Saul Centers
2005 2005Annual Report N2 Company Profile
Saul Centers, Inc. is a self-managed, self- Portfolio Composition Based on 2005 Property Operating Income administered equity real estate investment trust headquartered in Bethesda, Maryland. After the January 2006 acquisition of Smallwood Village Center, 73.1% Saul Centers operates and manages a real estate Shopping Centers portfolio of 45 community and neighborhood shopping centers and office properties totaling approximately 7.6 million square feet of leasable area. Over 80% of 26.9% Office the cash flow is generated from properties in the metropolitan Washington, DC/Baltimore area.
Saul Centers’ primary operating strategy is to focus on continuing its program of internal growth, renovations, and expansions of community and neighborhood shopping centers that primarily 81.0% serve the day-to-day necessities and services Metropolitan sub-sector of the overall retail market. The Company Washington, DC/ Baltimore Area plans to supplement its growth through effective 19.0% development of new office and retail properties and Rest of U.S. acquisitions of operating properties as appropriate opportunities arise.
Shares of Saul Centers are O traded on the New York Stock Exchange under the symbol “BFS.” N3 Historic Operating Performance
Total Revenue Net Income (In millions) Available to Common Shareholders (In millions) $127.0 $21.2
$19.6 $112.8
$18.2 $18.0
$97.9 $17.3 $94.0
$86.3
2001 2002 2003 2004 2005 2001 2002 2003 2004 2005
Funds From Operations Available to Common Shareholders (In millions) $53.2
$47.0
$44.0 $43.7
$40.1
2001 2002 2003 2004 2005
* Funds From Operations (FFO) is a non-GAAP financial measure. See page 52 for a definition of FFO and reconciliation to Net Income. N4 Financial Highlights
Year ended December 31, 2005 2004 2003 2002 2001
Summary Financial Data Total Revenue $127,015,000 $112,842,000 $ 97,884,000 $93,963,000 $86,308,000 Net Income Available to Common Stockholders $ 21,227,000 $ 18,174,000 $ 17,998,000 $19,566,000 $17,314,000 FFO Available to Common Shareholders $ 53,222,000 $ 47,031,000 $ 43,740,000 $44,031,000 $40,141,000 Average Common Stock Outstanding 16,770,554 16,210,736 15,607,890 14,886,505 14,210,470 Average Shares and Units Outstanding 22,002,922 21,404,976 20,790,216 20,059,264 19,382,720 FFO Available to Common Shareholders Per Share (Diluted) $ 2.42 $ 2.20 $ 2.10 $ 2.20 $ 2.07 Net Income Available to Common Stockholders Per Share (Diluted) $ 1.27 $ 1.12 $ 1.15 $ 1.31 $ 1.22 Common Dividend as a Percentage of FFO (Per Share) 66% 71% 74% 71% 75% Interest Expense Coveragea 3.15 3.14 2.78 2.78 2.63
Property Data Number of Propertiesb 44 40 36 34 33 Total Portfolio Square Feet 7,376,000 7,217,000 6,532,000 6,272,000 6,159,000 Shopping Center Square Feet 6,170,000c 6,012,000 5,328,000 5,069,000 4,956,000 Office Square Feet 1,206,000 1,205,000 1,204,000 1,203,000 1,203,000 Average Percentage Leasedd 95% 94% 93% 94% 93%
(a) Interest expense coverage is defined as operating Elizabeth Arden’s Red Door Spa anchors income before the sum of interest expense and O the recently completed Kentlands Place amortization of deferred debt, and depreciation development in Gaithersburg, Maryland. and amortization, divided by interest expense. (b) Excludes development land parcels (Lansdowne Town Center, Broadlands Village III, Clarendon Center, Ashland Square, Lexington and New Market). (c) During 2005, approximately 301,000 square feet of space was taken out of service at Lexington for the planned redevelopment of the center. (d) Average percentage leased would have been 96% for both 2005 and 2004 if the Lexington redevelopment space was excluded from the calculation for the entire year. N5 Message to Our Shareholders
uring 2005, Saul Centers achieved new leasing percentage highs, completed several grocery- anchored neighborhood shopping center acquisitions, and commenced a very significant town center development which, together, position us well for 2006 and beyond. Our portfolio-wide leasing levels Daveraged 95% during 2005, our highest since inception as a public company in 1993. We acquired three quality grocery-anchored shopping centers in Florida, totaling 370,000 square feet of space, a 6% increase in our retail square footage. We commenced one of our most significant new developments with ground-breaking of the 191,000 square foot Lansdowne Town Center in Loudoun County, Virginia. Our dividend payout ratio was reduced to its historically lowest level of 66%, while the common dividend was increased from $0.39 per share in the fourth quarter of 2004 to the current level of $0.42 per share, a 7.7% annualized increase. Total debt and equity capitalization exceeded $1.3 billion at year end 2005. Our outlook remains very positive in the areas where we have focused our growth – the grocery-anchored retail property sector located in the Washington, DC metropolitan area and in other strong southeastern regions of the country.
2005 marked the acquisition of three retail properties O (clockwise from left) Seabreeze Plaza, Jamestown Place and Palm Springs Center.
ACQUISITIONS & DEVELOPMENTS square foot neighborhood shopping center with a 44,800 square foot supermarket. This property is Operating Property Acquisitions located within a community of over 102,000 people The year 2005 marked the acquisition of three more within a 3-mile radius whose household incomes retail operating properties. In March 2005, we average approximately $70,000. acquired the 126,400 square foot Albertson’s-anchored Palm Springs Center in Altamonte Springs, Florida, a Subsequent to year end, in January 2006, we acquired suburb of metropolitan Orlando. In November 2005, the 198,000 square foot Smallwood Village Center, we added the 96,400 square foot Jamestown Place located on 25 acres within the St. Charles planned located within five miles of Palm Springs Center. community in Waldorf, Maryland, a suburb of Jamestown Place is anchored by a 55,000 square foot metropolitan Washington, DC. This center is 89% Publix supermarket. An average of over 87,000 leased and is anchored by a recently remodeled and people, with annual household incomes averaging expanded 55,000 square foot Safeway supermarket greater than $75,000, live within a 3-mile radius of and a 10,000 square foot CVS drugstore. The St. these centers. Charles residential development is 60% complete and is expected to total approximately 25,000 dwelling Also in November 2005, we acquired Seabreeze Plaza, units. Over 43,000 people with annual household a Publix-anchored shopping center in Palm Harbor, incomes averaging greater than $71,000 are located Florida, near Tampa. Seabreeze Plaza is a 146,700 within a 3-mile radius of the center. N6 Message to Our Shareholders
2005 Developments & Redevelopments During 2005, we completed the construction and lease-up of four development projects which commenced between late 2003 and 2005. These developments are the 109,100 square foot Giant- anchored Shops at Monocacy in Frederick, Maryland, the 40,600 square foot Kentlands Place retail/office property adjacent to our Kentlands Square center Construction of four anchored by Lowes home improvement store in development projects was Gaithersburg, Maryland, and expansions to Thruway completed in 2005, including in Winston-Salem, North Carolina, and The Glen in (clockwise from top left) Prince William County, Virginia. All four of these O Thruway, Shops at Monocacy, projects were 100% leased at year end 2005. Kentlands Place and The Glen. Our redevelopment of Olde Forte Village, a Safeway- Rendering of the recently anchored neighborhood shopping center in Fort commenced Lansdowne Washington, Maryland, is nearing completion. Town Center. Construction of a new 33,000 square feet of small shop space has been completed. Fifteen of the 19 new stores, representing over 75% of the new leasable area, have been leased. The redeveloped center totals 143,100 square feet, and is 91% leased. 2005 FINANCIAL RESULTS Acquisitions and developments completed during 2004 2006 Developments and 2005 produced the significant portion of increased We expect the value added potential of ongoing and operating income in 2005. During 2004 and 2005, we planned development projects will continue to be invested over $185 million in seven operating property a significant driver of Saul Centers’ growth in acquisitions and five retail developments and future years. In November 2005, we commenced redevelopments totaling over 1.1 million square feet construction of the Harris Teeter-anchored 191,000 of new space. square foot Lansdowne Town Center in Loudoun County, Virginia. This development will be the town In 2005, total revenue increased 12.6% to $127,015,000 center within a planned community of over 5,500 compared to $112,842,000 in 2004. Operating income residences, approximately 2,500 of which are increased 9.8% to $37,025,000 compared to $33,707,000 constructed and currently occupied. Three-mile in 2004. Net income available to common average household incomes surrounding the planned stockholders was $21,227,000, or $1.27 per diluted development are approximately $120,000. Substantial share in 2005, resulting in a per share increase of completion of construction is scheduled in the fourth 13.4% compared to $18,174,000 or $1.12 per diluted quarter of 2006, with project costs expected to total share in 2004. approximately $42 million. Funds From Operations (FFO) available to common In late 2005, we commenced construction of the third shareholders (after deducting preferred stock phase of the Broadlands Village shopping center, also dividends) increased 13.2% to $53,222,000 in 2005. located in Loudoun County, Virginia. This phase will Diluted per share FFO available to common total 22,000 square feet of in-line shops, and over 80% shareholders increased 10.0% to $2.42 per share in of the space is pre-leased. Substantial completion of 2005 compared to $2.20 per share in 2004. The construction is scheduled for the third quarter of 2006. $6,191,000 increase in FFO was primarily due to increased operating income from retail acquisition In January 2006, we began building a 7,400 square and development properties and, to a lesser extent, foot expansion to our Ravenwood shopping center the receipt of a payment related to the resolution of in Towson, Maryland. Over 70% of this space is a land use dispute with a landowner adjacent to pre-leased and construction is projected to be Lexington Mall. substantially complete in the summer of 2006. N7 Message to Our Shareholders
RETAIL HIGHLIGHTS 96.9% of the retail portfolio was leased compared to Our retail portfolio consisted of 39 community and the prior year level of 95.7%. Also a factor in this neighborhood shopping center properties totaling 6.2 growth, new or renewal leases were signed at million square feet of space at the end of 2005. These average initial cash rental rates of approximately 9.6% shopping centers comprised 73.1% of Saul Centers’ over rents paid on expiring leases for the 695,000 2005 property operating income. square feet of lease renewals and rollovers. The 2004 and 2005 acquisitions, developments and We renewed a total of 74% of the expiring leases in redevelopments increased the leasable area of our 2005, as measured by annualized base rents at retail portfolio by over 20%. Substantially all of the expiration. This renewal rate was slightly higher than development and redevelopment activity was in the our 5-year average renewal rate of 71%. Real estate Washington, DC metropolitan area, while acquisitions taxes and property operating expenses for the core were spread between the Washington, DC area, properties increased 8.0%, largely due to increases Florida and Georgia. One of the key criteria we use to in utility expenses and insurance costs. Despite locate these additional properties is the demographic these increases, property operating income was characteristics of the surrounding neighborhoods. only minimally impacted, as overall retail expenses Population density within a 3-mile radius of these were 75% recoverable from tenants. new assets averaged over 73,000 people. Average Overall retail sales, based upon data supplied by household incomes within a 3-mile radius were over tenants required to report sales, totaled $311 per $92,000 comparing favorably to the national average square foot in 2005. On a same store basis, sales of $68,700. While acquiring 5 shopping centers in remained the same as 2004 levels, compared to the the southeastern United States over the past 2 years, preceeding 5-year average increase of 1.0% per year. our operating income generated from properties in Although the sales of many of our grocery anchors the metropolitan Washington, DC/Baltimore area have been impacted by competitive forces, the overall continues to exceed 79% of our total property average sales volume reported by our grocery stores operating income. totaled $470 per square foot, an indication that these During 2005, our same property operating income in stores attract healthy customer traffic to the retail the retail portfolio increased 2.6%. Leasing increases centers. contributed to this improvement. At year end 2005, N8 Message to Our Shareholders
In late 2005, construction commenced on a 22,000 square foot expansion to Broadlands O Village [left]. Over 80% of the new space is pre-leased. Newly acquired Seabreeze Plaza (top) is over 98% leased.
During 2005, we signed 198 new or renewal retail Avenue office building, located between the U.S. leases totaling 907,000 square feet of space. In the Capitol and The White House, is 100% leased and first two months of 2006, leasing activity continues to accounts for approximately 9.4% of our total property be strong. A total of approximately 665,000 square operating income. The building contains 12 tenants, feet of retail space is scheduled to expire during 2006 the largest totaling 55,000 square feet. A few of the and, as of March 1, 2006, 40% of this space has building’s significant tenants include the National already been leased. Gallery of Art, the American Association of Health Plans and the Credit Union National Association. As of year end 2005, 19 of our 27 grocery-anchored properties were occupied by market share leaders During 2005, same property operating income in the Giant Food, Safeway and Publix. These three grocers office portfolio increased 1.6%. The office portfolio typically hold the top two market share positions in was 96.6% leased at year end 2005, compared to the areas where our properties are located. This 95.9% a year earlier. dominant anchor profile is a key parameter of our Over 90% of the office leases have fixed annual core leasing strategy and acquisition selection. The escalations averaging over 2.5% per year. Only addition of our first four Publix-anchored shopping 125,000 square feet of the office portfolio’s leases are centers has added to the diversification of our grocery scheduled to expire in 2006, and as of March 1, 2006, tenants. Tenant diversity continues to be the other over 40% of this space has already been leased. Our primary focus of our leasing strategy, as we maintain diverse office tenant base minimizes credit risk, with that such diversity is essential to long term cash flow only one office tenant, the U.S. Government at 3.1%, stability. Overall, only two retail tenants in 2005 paid representing more than 2.5% of total 2005 revenue. annual rent in excess of 2.5% of total revenue – Giant Over 97% of the property operating income in the Food at 5.3% and Safeway at 3.1%. office portfolio is generated from properties in the Washington, DC metropolitan area. This market area OFFICE HIGHLIGHTS has consistently experienced above average job Our five office/industrial properties, totaling over 1.2 growth and below average vacancy rates compared million square feet of leasable area, contributed 26.9% to the nation’s other major metropolitan areas. of the 2005 property operating income. Our premier The federal government and related private sector asset, the 226,000 square foot 601 Pennsylvania contractors continue to be the primary drivers behind N9 Message to Our Shareholders
601 Pennsylvania Avenue (above), Saul Centers’ O premier office asset, is 100% leased and accounts for 9.4% of total property operating income.
the job growth in this region. Office market vacancy Final site plan approval is expected during 2006. In rates in the District of Columbia are approximately 8% March 2005, we closed on the acquisition of a 7.1 acre and surrounding Maryland and Northern Virginia parcel of land in New Market, Maryland, a growing submarket vacancy rates are 10% and 12%, area of Frederick County. We added a contiguous 28.4 respectively, continuing to be well below national acre tract in September 2005 which, together, will averages of approximately 15%. accommodate a neighborhood shopping center development in excess of 120,000 square feet. FUTURE DEVELOPMENT PIPELINE Finally, we continue to pursue zoning and site plan We have future opportunities in four well located land approvals for a significant mixed-use development parcels totaling approximately 80 acres and zoned to on an assemblage of land totaling 1.5 acres adjacent accommodate over 880,000 square feet of retail and to the Clarendon Metro Station in Arlington, Virginia. mixed-use development. In September 2005, we The site is zoned for over 300,000 square feet of resolved a land dispute at Lexington Mall, allowing commercial development. increased flexibility in future development rights for this 26 acre site in Lexington, Kentucky. We also reached agreement with Dillard’s, the previous CAPITAL STRUCTURE Our balance sheet provides us both availability of anchor at Lexington Mall, to terminate its lease capital with which to execute our business plan, and during October 2005. During the fourth quarter of comfortable interest expense and dividend coverage 2005, concurrent with the closing of Dillard’s, this to provide our investors a stable income stream. Lexington Mall property was removed from operations At the end of 2005, we had borrowing availability of and placed in development. We have engaged $139 million on our revolving credit line for general land planners and assembled a team to proceed corporate use and for funding future acquisition and with conceptual designs. The site is zoned to development opportunities. Our interest expense accommodate over 300,000 square feet of retail space. coverage was 3.2 times for the year, and we In December 2004, we acquired a 19.3 acre parcel of maintained prudent leverage of approximately 35% land in Prince William County, Virginia. The site is debt to total capitalization at December 31, 2005. zoned for development of a grocery-anchored Our weighted average interest rate was 6.9%, with neighborhood shopping center of approximately 98% of our debt being fixed-rate non-recourse 160,000 square feet, to be known as Ashland Square. mortgages with an average maturity of 9.3 years. N10 Message to Our Shareholders
We remain confident that we are well O positioned to continue to achieve long- term property operating income growth in our core portfolio.
A 66% dividend payout ratio, the ratio of common Our Series A Preferred Stock, issued in November stock dividends to FFO, provides both strong dividend 2003 and a catalyst for the accelerated growth in security as well as retained earnings for continued acquisitions and developments over the past 2 redevelopment and acquisition opportunities. years, closed the 2005 year at a price of $25.63 per depositary share, yielding 7.8%. The Series A MARKET PERFORMANCE Preferred Stock shares are listed and traded on Shares of “BFS” common stock are listed and traded the New York Stock Exchange as “BFS.PrA”. on the New York Stock Exchange and closed the 2005 Investors in great numbers continue to seek real year at a price of $36.10 per share. After paying out estate properties, thus acquisition competition is $0.39 per share in common dividends during the first intense and returns remain thin. We will continue two quarters, the dividend was increased to $0.40 to be diligent in our analysis of opportunities and be per share and $0.42 per share in the third and final patient in our approach. We remain confident that calendar quarters, respectively. The current we are well positioned to continue to achieve long- annualized dividend of $1.68 per share represents a term property operating income growth in our core 7.7% increase over the annualized dividend a year portfolio, as well as add to this growth as our team ago. Although the total return (the combination of implements our development plans. Our development the common stock’s dividend yield and its share price pipeline should create unique opportunities and appreciation) in 2005 was a negative 1.1%, our 5-year attractive returns over the coming years. Our business total return was 21.8% per year. The 10-year total model has always emphasized cash flow stability return was 19.9% per year, which ranked Saul Centers and long-term value creation, and we look forward to in the top third of the stocks comprising the NAREIT continuing to deliver results in 2006 and beyond. Equity Index. Since our 1993 initial public offering, investors that have been with us from inception have For the Board realized a compounded annual total return of over 14.1%.
B. Francis Saul II March 9, 2006 N11 Portfolio Properties
As of December 31, 2005, Saul Centers’ portfolio properties were located in Virginia, Maryland, Washington, DC, North Carolina, Oklahoma, New O Jersey, Georgia, Kentucky and Florida. Properties in the metropolitan Washington, DC/Baltimore area represent 70% of the portfolio’s gross leasable area.
Gross Leasable Gross Leasable Property/Location Square Feet Property/Location Square Feet
Shopping Centers Lumberton Plaza, Lumberton, NJ 193,044 Ashburn Village, Ashburn, VA 211,327 Shops at Monocacy, Frederick, MD 109,144 Beacon Center, Alexandria, VA 352,365 Olde Forte Village, Ft. Washington, MD 143,062 Belvedere, Baltimore, MD 54,941 Olney, Olney, MD 53,765 Boca Valley Plaza, Boca Raton, FL 121,269 Palm Springs Center, Altamonte Springs, FL 126,446 Boulevard, Fairfax, VA 56,350 Ravenwood, Baltimore, MD 85,958 Briggs Chaney MarketPlace, Silver Spring, MD 197,486 Seabreeze Plaza, Palm Harbor, FL 146,673 Broadlands Village, Loudoun County, VA 107,286 Seven Corners, Falls Church, VA 560,998 Broadlands Village II, Loudoun County, VA 30,193 Shops at Fairfax, Fairfax, VA 68,743 Clarendon/Clarendon Station, Arlington, VA 11,808 Southdale, Glen Burnie, MD 484,115 Countryside, Loudoun County, VA 141,696 Southside Plaza, Richmond, VA 373,651 Cruse MarketPlace, Forsyth County, GA 78,686 South Dekalb Plaza, Atlanta, GA 163,418 Flagship Center, Rockville, MD 21,500 Thruway, Winston-Salem, NC 352,355 French Market, Oklahoma City, OK 244,724 Village Center, Centreville, VA 143,109 Germantown, Germantown, MD 26,241 West Park, Oklahoma City, OK 76,610 Giant, Baltimore, MD 70,040 White Oak, Silver Spring, MD 480,156 The Glen, Lake Ridge, VA 134,317 Total Shopping Centers 6,170,423 Great Eastern, District Heights, MD 254,448 Office Properties Hampshire Langley, Takoma Park, MD 131,700 Avenel Business Park, Gaithersburg, MD 390,579 Jamestown Place, Altamonte Springs, FL 96,372 Crosstown Business Center, Tulsa, OK 197,135 Kentlands Square, Gaithersburg, MD 114,381 601 Pennsylvania Ave, Washington, DC 226,604 Kentlands Place, Gaithersburg, MD 40,648 Van Ness Square, Washington, DC 156,493 Leesburg Pike, Baileys Crossroads, VA 97,752 Washington Square, Alexandria, VA 235,042 Lexington Mall, Lexington, KY 13,646 Total Office Properties 1,205,853 Total Portfolio 7,376,276 Additional development parcels include Broadlands Village III (5.5 acres), Clarendon Center (1.3 acres), Lansdowne Town Center (23.4 acres), Ashland Square (19.3 acres), Lexington (26.0 acres) and New Market (35.5 acres.)
N13 Management’s Report on Internal Control Over Financial Reporting
Assessment of Effectiveness of Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework to assess the effectiveness of the Company’s internal control over financial reporting. Based upon the assessment, the Company’s management has concluded that, as of December 31, 2005, the Company’s internal control over financial reporting was effective. The Company’s independent registered public accounting firm has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting, which appears on page 14 of this Annual Report. N14 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Board of Directors and Stockholders assets of the company; (2) provide reasonable Saul Centers, Inc. assurance that transactions are recorded as necessary to permit preparation of financial We have audited management’s Assessment of statements in accordance with generally accepted Effectiveness of Internal Control Over Financial accounting principles, and that receipts and Reporting included on page 13 of this Annual Report, expenditures of the company are being made only in that Saul Centers, Inc. maintained effective internal accordance with authorizations of management and control over financial reporting as of December 31, directors of the company; and (3) provide reasonable 2005, based on criteria established in Internal assurance regarding prevention or timely detection of Control—Integrated Framework issued by the unauthorized acquisition, use, or disposition of the Committee of Sponsoring Organizations of the company’s assets that could have a material effect on Treadway Commission (the COSO criteria). Saul the financial statements. Centers, Inc’s management is responsible for maintaining effective internal control over financial Because of its inherent limitations, internal control reporting and for its assessment of the effectiveness over financial reporting may not prevent or detect of internal control over financial reporting. Our misstatements. Also, projections of any evaluation of responsibility is to express an opinion on effectiveness to future periods are subject to the risk management’s assessment and an opinion on the that controls may become inadequate because of effectiveness of the company’s internal control over changes in conditions, or that the degree of financial reporting based on our audit. compliance with the policies or procedures may deteriorate. We conducted our audit in accordance with the standards of the Public Company Accounting In our opinion, management’s assessment that Saul Oversight Board (United States). Those standards Centers, Inc. maintained effective internal control over require that we plan and perform the audit to obtain financial reporting as of December 31, 2005, is fairly reasonable assurance about whether effective stated, in all material respects, based on the COSO internal control over financial reporting was criteria. Also, in our opinion, Saul Centers, Inc. maintained in all material respects. Our audit included maintained, in all material respects, effective internal obtaining an understanding of internal control over control over financial reporting as of December 31, financial reporting, evaluating management’s 2005, based on the COSO criteria. assessment, testing and evaluating the design and We also have audited, in accordance with the operating effectiveness of internal control, and standards of the Public Company Accounting performing such other procedures as we considered Oversight Board (United States), the consolidated necessary in the circumstances. We believe that our balance sheets of Saul Centers, Inc. as of December audit provides a reasonable basis for our opinion. 31, 2005 and 2004, and the related consolidated A company’s internal control over financial reporting statements of operations, stockholders' equity is a process designed to provide reasonable (deficit), and cash flows for each of the three years in assurance regarding the reliability of financial the period ended December 31, 2005 of Saul Centers, reporting and the preparation of financial statements Inc. and our report dated March 8, 2006 expressed an for external purposes in accordance with generally unqualified opinion thereon. accepted accounting principles. A company’s internal Ernst & Young LLP control over financial reporting includes those policies McLean, Virginia and procedures that (1) pertain to the maintenance of March 8, 2006 records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the N15 Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders In our opinion, the financial statements referred to Saul Centers, Inc. above present fairly, in all material respects, the consolidated financial position of Saul Centers, Inc. We have audited the accompanying consolidated at December 31, 2005 and 2004, and the consolidated balance sheets of Saul Centers, Inc. as of December results of their operations and their cash flows for 31, 2005 and 2004, and the related consolidated each of the three years in the period ended December statements of operations, stockholders' equity 31, 2005, in conformity with U.S. generally accepted (deficit), and cash flows for each of the three years in accounting principles. the period ended December 31, 2005. These financial statements are the responsibility of the Company's We also have audited, in accordance with the management. Our responsibility is to express an standards of the Public Company Accounting opinion on these financial statements based on our Oversight Board (United States), the effectiveness of audits. Saul Centers, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria We conducted our audits in accordance with the established in Internal Control—Integrated Framework standards of the Public Company Accounting issued by the Committee of Sponsoring Organizations Oversight Board (United States). Those standards of the Treadway Commission and our report dated require that we plan and perform the audit to obtain March 8, 2006 expressed an unqualified opinion reasonable assurance about whether the financial thereon. statements are free of material misstatement. An audit includes examining, on a test basis, evidence Ernst & Young LLP supporting the amounts and disclosures in the McLean, Virginia financial statements. An audit also includes assessing March 8, 2006 the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. N16 Consolidated Balance Sheets
(In thousands, except per share amounts) December 31, 2005 December 31, 2004
Assets Real estate investments Land $ 139,421 $ 119,029 Buildings and equipment 575,504 521,161 Construction in progress 47,868 42,618 762,793 682,808 Accumulated depreciation (195,376) (181,420) 567,417 501,388 Cash and cash equivalents 8,007 33,561 Accounts receivable and accrued income, net 23,410 20,654 Leasing costs, net 19,834 17,745 Prepaid expenses, net 2,540 2,421 Deferred debt costs, net 5,875 5,011 Other assets 4,386 2,616 Total assets $ 631,469 $ 583,396
Liabilities Mortgage notes payable $ 471,931 $ 453,646 Revolving credit facility outstanding 10,500 – Dividends and distributions payable 11,319 10,424 Accounts payable, accrued expenses and other liabilities 13,679 12,318 Deferred income 9,558 6,044 Total liabilities 516,987 482,432
Minority interests 3,068 –
Stockholders' equity Series A Cumulative Redeemable Preferred stock, 1,000,000 shares authorized and 40,000 shares issued and outstanding 100,000 100,000 Common stock, $0.01 par value, 30,000,000 shares authorized, 16,877,244 and 16,399,442 shares issued and outstanding, respectively 169 164 Additional paid-in capital 123,339 106,886 Accumulated deficit (112,094) (106,086) Total stockholders' equity 111,414 100,964 Total liabilities and stockholders' equity $ 631,469 $ 583,396
The accompanying notes are an integral part of these statements. N17 Consolidated Statements of Operations
For the Year Ended December 31, (Dollars in thousands, except per share amounts) 2005 2004 2003 Revenue Base rent $ 99,448 $ 91,125 $ 78,167 Expense recoveries 20,027 16,712 14,438 Percentage rent 2,057 1,635 1,695 Other 5,483 3,370 3,584 Total revenue 127,015 112,842 97,884 Operating expenses Property operating expenses 14,724 12,070 11,363 Provision for credit losses 237 488 171 Real estate taxes 11,040 9,789 8,580 Interest expense and amortization of deferred debt 30,207 27,022 26,573 Depreciation and amortization of leasing costs 24,197 21,324 17,838 General and administrative 9,585 8,442 6,213 Total operating expenses 89,990 79,135 70,738 Operating income before minority interests and gain on sale of property 37,025 33,707 27,146 Non-operating item: Gain on sale of property – 572 182 Net operating income before minority interests 37,025 34,279 27,328 Minority interests Minority share of income (6,937) (6,386) (6,495) Distributions in excess of earnings (861) (1,719) (1,591) Total minority interests (7,798) (8,105) (8,086) Net income 29,227 26,174 19,242 Preferred dividends (8,000) (8,000) (1,244) Net income available to common stockholders $ 21,227 $ 18,174 $ 17,998 Per share net income available to common stockholders Basic $ 1.27 $ 1.13 $ 1.15 Diluted $ 1.27 $ 1.12 $ 1.15 Distributions declared per common share outstanding $ 1.63 $ 1.56 $ 1.56
The accompanying notes are an integral part of these statements. N18 Consolidated Statements of Stockholder’s Equity (Deficit)
Additional Preferred Common Paid-in Accumulated (Dollars in thousands, except per share amounts) Stock Stock Capital Deficit Total Stockholders' equity (deficit): Balance, December 31, 2002 $–$ 152 $ 79,131 $ (92,550) $ (13,267) Issuance of 664,651 shares of common stock: 552,170 shares due to dividend reinvestment plan – 6 13,697 – 13,703 112,481 shares due to employee stock options, directors' deferred stock plan and stock option awards – 1 2,314 – 2,315 Issuance of 40,000 shares of preferred stock 100,000 – (3,673) – 96,327 Net income – – – 19,242 19,242 Distributions payable preferred stock ($31.00 per share) – – – (1,244) (1,244) Common stock distributions – – – (18,247) (18,247) Distributions payable common stock ($.39 per share) – – – (6,186) (6,186) Balance, December 31, 2003 100,000 159 91,469 (98,985) 92,643 Issuance of 538,208 shares of common stock: 497,282 shares due to dividend reinvestment plan – 5 14,077 – 14,082 40,928 shares due to employee stock options, directors' deferred stock plan and stock option awards – – 1,340 – 1,340 Net income – – – 26,174 26,174 Preferred stock distributions – – – (6,000) (6,000) Distributions payable preferred stock ($50.00 per share) – – – (2,000) (2,000) Common stock distributions – – – (18,879) (18,879) Distributions payable common stock ($.39 per share) – – – (6,396) (6,396) Balance, December 31, 2004 100,000 164 106,886 (106,086) 100,964 Issuance of 477,802 shares of common stock: 455,494 shares due to dividend reinvestment plan – 5 15,402 – 15,407 22,308 shares due to employee stock options, directors' deferred stock plan and stock option awards – – 1,051 – 1,051 Net income – – – 29,227 29,227 Preferred stock distributions – – – (6,000) (6,000) Distributions payable preferred stock ($50.00 per share) – – – (2,000) (2,000) Common stock distributions – – – (20,146) (20,146) Distributions payable common stock ($.42 per share) – – – (7,089) (7,089) Balance, December 31, 2005 $ 100,000 $ 169 $ 123,339 $ (112,094) $ 111,414
The accompanying notes are an integral part of these statements. N19 Consolidated Statements of Cash Flows
For the Year Ended December 31, (Dollars in thousands) 2005 2004 2003 Cash flows from operating activities: Net income $ 29,227 $ 26,174 $ 19,242 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of property – (572) (182) Minority interests 7,798 8,105 8,086 Depreciation and amortization of leasing costs 24,197 21,324 17,838 Amortization of deferred debt costs 1,161 929 801 Non-cash compensation costs from stock grants and options 718 571 353 Provision for credit losses 237 488 171 Increase in accounts receivable and accrued income (2,843) (6,003) (2,308) Increase in leasing costs (2,940) (2,266) (2,303) (Increase) decrease in prepaid expenses (119) 188 (3,250) (Increase) decrease in other assets (1,770) (355) 171 Increase (decrease) in accounts payable, accrued expenses and other liabilities 1,425 1,630 (897) Increase (decrease) in deferred income 1,310 473 (6) Net cash provided by operating activities 58,401 50,686 37,716 Cash flows from investing activities: Acquisitions of real estate investments, net* (47,745) (78,509) (26,375) Additions to real estate investments (9,175) (6,425) (7,709) Additions to development and redevelopment activities (16,885) (29,366) (15,317) Proceeds from sale of asset – 833 280 Net cash used in investing activities (73,805) (113,467) (49,121) Cash flows from financing activities: Proceeds from notes payable 25,500 94,800 93,134 Repayments on notes payable (20,794) (16,427) (69,879) Proceeds from revolving credit facility 10,500 33,000 35,000 Repayments on revolving credit facility – (33,000) (81,750) Additions to deferred debt costs (2,025) (1,716) (900) Proceeds from the issuance of preferred stock, net of issuance costs – – 96,327 Proceeds from the issuance of common stock and convertible limited partnership units in the Operating Partnership 19,556 14,851 15,665 Distributions to preferred stockholders (8,000) (7,244) – Distributions to common stockholders and holders of convertible limited partnership units in the Operating Partnership (34,887) (33,166) (32,257) Net cash (used) provided by financing activities (10,150) 51,098 55,340 Net decrease in cash and cash equivalents (25,554) (11,683) 43,935 Cash and cash equivalents, beginning of year 33,561 45,244 1,309 Cash and cash equivalents, end of year $ 8,007 $ 33,561 $ 45,244 Supplemental disclosure of cash flow information: Cash paid for interest $ 32,112 $ 28,682 $ 26,878
* Supplemental discussion of non-cash investing and financing activities: The $47,745,000 shown as 2005 real estate acquisitions does not include any mortgage assumed as this represents a non-cash acquisition cost. On November 30, 2005, the Company purchased Seabreeze Plaza at an acquisition cost of $25,912,000 and assumed a mortgage of $13,579,000 with the balance being paid in cash. The $78,509,000 shown as 2004 real estate acquisitions does not include $18,025,000 in total assumed mortgages for 2 of the properties acquired during the year. On February 13, 2004, the Company purchased Boca Valley Plaza for an acquisition cost of $17,678,000 and assumed a mortgage in an amount of $9,200,000 with the balance being paid in cash. On March 25, 2004, the Company purchased Cruse MarketPlace for an acquisition cost of $12,897,000 and assumed a mortgage of $8,825,000 with the balance being paid in cash.
The accompanying notes are an integral part of these statements. N20 Notes to Consolidated Financial Statements
1. ORGANIZATION, FORMATION, the fourth quarter of 2003, the Company completed AND BASIS OF PRESENTATION construction of Broadlands Village Phase I, an in-line retail and retail pad, grocery anchored shopping center. Phase II, Organization a 30,000 square foot addition to the center was completed in Saul Centers, Inc. (“Saul Centers”) was incorporated under November 2004. In January 2004, the Company purchased the Maryland General Corporation Law on June 10, 1993. a land parcel adjacent to its Kentlands Square shopping Saul Centers operates as a real estate investment trust (a center, and constructed a 41,000 square foot retail/office “REIT”) under the Internal Revenue Code of 1986, as property known as Kentlands Place. During 2004 and 2005 amended (the “Code”). Saul Centers generally will not be the Company acquired seven grocery anchored shopping subject to federal income tax, provided it annually distributes centers; (1) Boca Valley Plaza, 121,000 square feet, located at least 90% of its REIT taxable income to its stockholders in Boca Raton, Florida, (2) Countryside, 142,000 square feet and meets certain organizational and other requirements. located in Loudoun County, Virginia, (3) Cruse MarketPlace, Saul Centers has made and intends to continue to make 79,000 square feet, located in Forsyth County, Georgia, (4) regular quarterly distributions to its stockholders. Saul Briggs Chaney MarketPlace, 197,000 square feet, located in Centers, together with its wholly owned subsidiaries and the Silver Spring, Maryland, (5) Palm Springs Center, 126,000 limited partnerships of which Saul Centers or one of its square feet, located in Altamonte Springs, Florida, (6) subsidiaries is the sole general partner, are referred to Jamestown Place, 96,000 square feet, located in Altamonte collectively as the “Company”. B. Francis Saul II serves as Springs, Florida and (7) Seabreeze Plaza, 147,000 square feet, Chairman of the Board of Directors and Chief Executive located in Palm Harbor, Florida. As of December 31, 2005, the Officer of Saul Centers. Company's properties (the “Current Portfolio Properties”) consisted of 39 operating shopping center properties (the Formation and Structure of Company “Shopping Centers”), five predominantly office operating Saul Centers was formed to continue and expand the properties (the “Office Properties”) and six (non-operating) shopping center business previously owned and conducted development properties. by the B.F. Saul Real Estate Investment Trust, the B.F. Saul The Company established Saul QRS, Inc., a wholly owned Company, Chevy Chase Bank, F.S.B. and certain other subsidiary of Saul Centers, to facilitate the placement of affiliated entities, each of which is controlled by B. Francis collateralized mortgage debt. Saul QRS, Inc. was created to Saul II and his family members (collectively, “The Saul succeed to the interest of Saul Centers as the sole general Organization”). On August 26, 1993, members of The Saul partner of Saul Subsidiary I Limited Partnership. The Organization transferred to Saul Holdings Limited remaining limited partnership interests in Saul Subsidiary I Partnership, a newly formed Maryland limited partnership Limited Partnership and Saul Subsidiary II Limited (the “Operating Partnership”), and two newly formed Partnership are held by the Operating Partnership as the subsidiary limited partnerships (the “Subsidiary sole limited partner. Through this structure, the Company Partnerships”, and collectively with the Operating owns 100% of the Current Portfolio Properties. Partnership, the “Partnerships”), shopping center and office properties, and the management functions related to the Basis of Presentation transferred properties. Since its formation, the Company has The accompanying financial statements of the Company have developed and purchased additional properties. The been presented on the historical cost basis of The Saul Company has developed and purchased several properties Organization because of affiliated ownership and common since mid year 2003. In July 2003, the Company purchased management and because the assets and liabilities were Olde Forte Village, a grocery anchored shopping center the subject of a business combination with the Operating located in Fort Washington, Maryland. In November 2004, Partnership, the Subsidiary Partnerships and Saul Centers, the Company completed construction of Shops at Monocacy, all newly formed entities with no prior operations. a grocery anchored shopping center in Frederick, Maryland, the land of which was acquired in November 2003. During N21 Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT to in-place leases and customer relationships in accordance ACCOUNTING POLICIES with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) 141, Nature of Operations “Business Combinations.” The purchase price is allocated The Company, which conducts all of its activities through based on the relative fair value of each component. The fair its subsidiaries, the Operating Partnership and Subsidiary value of buildings is determined as if the buildings were Partnerships, engages in the ownership, operation, vacant upon acquisition and subsequently leased at market management, leasing, acquisition, renovation, expansion, rental rates. As such, the determination of fair value development and financing of community and neighborhood considers the present value of all cash flows expected to shopping centers and office properties, primarily in the be generated from the property including an initial lease-up Washington, DC/Baltimore metropolitan area. Because the period. The Company determines the fair value of above and properties are located primarily in the Washington, below market intangibles associated with in-place leases DC/Baltimore metropolitan area, the Company is subject to by assessing the net effective rent and remaining term of a concentration of credit risk related to these properties. the lease relative to market terms for similar leases at A majority of the Shopping Centers are anchored by several acquisition. In the case of below market leases, the major tenants. As of December 31, 2005, twenty-seven of Company considers the remaining contractual lease period the Shopping Centers were anchored by a grocery store and renewal periods, taking into consideration the likelihood and offer primarily day-to-day necessities and services. of the tenant exercising its renewal options. The fair value No single property accounted for more than 7.6% of the of a below market lease component is recorded as deferred total gross leasable area. Only two retail tenants, Giant income and amortized as additional lease revenue over the Food (5.3%), a tenant at nine Shopping Centers and Safeway remaining contractual lease period and any renewal option (3.1%), a tenant at six Shopping Centers and one office periods included in the valuation analysis. The fair value of tenant, the United States Government (3.1%), a tenant at above market lease intangibles is recorded as a deferred six properties, individually accounted for more than 2.5% asset and is amortized as a reduction of lease revenue over of the Company’s total revenue for the year ended December the remaining contractual lease term. The Company 31, 2005. determines the fair value of at-market in-place leases considering the cost of acquiring similar leases, the foregone Principles of Consolidation rents associated with the lease-up period and carrying costs The accompanying consolidated financial statements of associated with the lease-up period. Intangible assets the Company include the accounts of Saul Centers, its associated with at-market in-place leases are amortized subsidiaries, and the Operating Partnership and Subsidiary as additional expense over the remaining contractual lease Partnerships which are majority owned by Saul Centers. term. To the extent customer relationship intangibles are All significant intercompany balances and transactions have present in an acquisition, the fair value of the intangibles been eliminated in consolidation. are amortized over the life of the customer relationship. Real estate investment properties are reviewed for potential Use of Estimates impairment losses quarterly or whenever events or changes The preparation of financial statements in conformity with in circumstances indicate that the carrying amount of an accounting principles generally accepted in the United asset may not be recoverable. If there is an event or change States requires management to make estimates and in circumstance indicating the potential for an impairment in assumptions that affect the reported amounts of assets and the value of a real estate investment property, the Company's liabilities and disclosure of contingent assets and liabilities policy is to assess potential impairment in value by making at the date of the financial statements and the reported a comparison of the current and projected operating cash amounts of revenues and expenses during the reporting flows of the property over its remaining useful life, on an period. Actual results could differ from those estimates. undiscounted basis, to the carrying amount of that property. If such carrying amount is in excess of the estimated Real Estate Investment Properties projected operating cash flows of the property, the Company would recognize an impairment loss equivalent to an amount The Company purchases real estate investment properties required to adjust the carrying amount to its estimated fair from time to time and allocates the purchase price to various market value. The Company has not recognized an components, such as land, buildings, and intangibles related impairment loss in 2005, 2004 or 2003 on any of its real estate. N22 Notes to Consolidated Financial Statements
Interest, real estate taxes and other carrying costs are spent performing leasing related activities. Such activities capitalized on projects under development and construction. include evaluating the prospective tenant's financial Once construction is substantially completed and the assets condition, evaluating and recording guarantees, collateral are placed in service, their rental income, real estate tax and other security arrangements, negotiating lease terms, expense, property operating expenses (consisting of payroll, preparing lease documents and closing the transaction. The repairs and maintenance, utilities, insurance and other carrying amount of costs are written-off to expense if the property related expenses) and depreciation are included applicable lease is terminated prior to expiration of the initial in current operations. Property operating expenses are lease term. charged to operations as incurred. Interest expense capitalized totaled $3,258,000, $3,227,000 and $1,382,000, Construction in Progress for 2005, 2004 and 2003, respectively. In the initial rental Construction in progress includes preconstruction costs and operations of development projects, a project is considered development costs of active projects. Preconstruction costs substantially complete and available for occupancy upon associated with these active projects include legal, zoning completion of tenant improvements, but no later than one and permitting costs and other project carrying costs year from the cessation of major construction activity. incurred prior to the commencement of construction. Substantially completed portions of a project are accounted Development costs include direct construction costs and for as separate projects. indirect costs incurred subsequent to the start of Depreciation is calculated using the straight-line method construction such as architectural, engineering, construction and estimated useful lives of 35 to 50 years for base buildings management and carrying costs consisting of interest, real and up to 20 years for certain other improvements that estate taxes and insurance. Construction in progress extend the useful lives. In addition, we capitalize leasehold balances as of December 31, 2005 and 2004 are as follows: improvements when certain criteria are met, including when we supervise construction and will own the improvement. Leasehold improvements are amortized, over the shorter Construction in Progress of the lives of the related leases or the useful life of the December 31, improvement, using the straight-line method. Depreciation (In thousands) 2005 2004 expense and amortization of leasehold improvements for the years ended December 31, 2005, 2004 and 2003 was Clarendon Center $ 16,629 $ 14,976 $19,824,000, $17,061,000 and $14,649,000, respectively. Lansdowne Town Center 10,348 6,872 Repairs and maintenance expense totaled $6,329,000, Ashland Square 7,262 6,411 $4,927,000 and $4,943,000, for 2005, 2004 and 2003, Kentlands Place -- 5,905 respectively, and is included in operating expenses in the Olde Forte Village 5,667 4,755 accompanying consolidated financial statements. Broadlands Village III 3,638 1,660 Lexington 1,972 -- Lease Acquisition Costs Ravenwood 607 -- Certain initial direct costs incurred by the Company in Other 1,745 2,039 negotiating and consummating a successful lease are capitalized and amortized over the initial base term of the Total $ 47,868 $ 42,618 lease. These costs total $19,834,000 and $17,745,000, net of accumulated amortization of $11,392,000 and $9,461,000 as Accounts Receivable and Accrued Income of December 31, 2005 and 2004, respectively. Amortization Accounts receivable primarily represent amounts currently expense, included in depreciation and amortization in the due from tenants in accordance with the terms of the consolidated statements of operations, totaled $4,373,000, respective leases. Receivables are reviewed monthly and $4,263,000 and $3,189,000, for the years ended December 31, reserves are established with a charge to current period 2005, 2004 and 2003, respectively. Capitalized leasing costs operations when, in the opinion of management, collection consist of commissions paid to third party leasing agents as of the receivable is doubtful. Accounts receivable in the well as internal direct costs such as employee compensation accompanying consolidated financial statements are shown and payroll related fringe benefits directly related to time net of an allowance for doubtful accounts of $430,000 and $1,125, 000, at December 31, 2005 and 2004, respectively. N23 Notes to Consolidated Financial Statements
Deferred Income Allowance for Doubtful Accounts Deferred income consists of payments received from tenants For the Year Ended prior to the time they are earned and recognized by the December 31, Company as revenue. These payments include prepayment (In thousands) 2005 2004 of the following month’s rent, prepayment of real estate taxes when the taxing jurisdiction has a fiscal year differing from Beginning Balance $ 1,125 $ 881 the calendar year reimbursements specified in the lease Provision for Credit Losses 237 488 agreement and advance payments by tenants for tenant Charge-offs (932) (244) construction work provided by the Company. In addition, Ending Balance $ 430 $ 1,125 deferred income includes the fair value of a below market lease component associated with acquisition properties as In addition to rents due currently, accounts receivable determined pursuant to the application of SFAS 141 include $14,701,000 and $12,101,000, at December 31, 2005 “Business Combinations”. and 2004, respectively, representing minimum rental income accrued on a straight-line basis to be paid by tenants over Revenue Recognition the remaining term of their respective leases. These Rental and interest income is accrued as earned except amounts are presented after netting allowances of $64,000 when doubt exists as to collectibility, in which case the and $237,000, respectively, for tenants whose rent payment accrual is discontinued. Recognition of rental income history or financial condition cast doubt upon the tenant’s commences when control of the space has been given to the ability to perform under its lease obligations. tenant. When rental payments due under leases vary from a straight-line basis because of free rent periods or stepped Cash and Cash Equivalents increases, income is recognized on a straight-line basis in Cash and cash equivalents include short-term investments. accordance with accounting principles generally accepted Short-term investments are highly liquid investments that are in the United States. Expense recoveries represent a portion both readily convertible to cash and so near their maturity of property operating expenses billed to the tenants, that they present insignificant risk of changes in value arising including common area maintenance, real estate taxes and from interest rate fluctuations. Short-term investments other recoverable costs. Expense recoveries are recognized include money market accounts and other investments which in the period when the expenses are incurred. Rental generally mature within three months, measured from the income based on a tenant's revenues (“percentage rent”) is acquisition date. accrued when a tenant reports sales that exceed a specified breakpoint. Deferred Debt Costs Deferred debt costs consist of fees and costs incurred to Income Taxes obtain long-term financing, construction financing and the The Company made an election to be treated, and intends to revolving line of credit. These fees and costs are being continue operating so as to qualify as a REIT under sections amortized over the terms of the respective loans or 856 through 860 of the Internal Revenue Code of 1986, as agreements, which approximates the effective interest amended, commencing with its taxable year ending method. Deferred debt costs totaled $5,875,000 and December 31, 1993. A REIT generally will not be subject to $5,011,000, net of accumulated amortization of $3,155,000 and federal income taxation on that portion of its income that $4,229,000, at December 31, 2005 and 2004, respectively. qualifies as REIT taxable income to the extent that it During 2005, $2,235,000 of fully amortized deferred debt costs distributes at least 90% of its REIT taxable income to was written-off. stockholders and complies with certain other requirements. Therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements. N24 Notes to Consolidated Financial Statements
Stock Based Employee Compensation, Deferred per year over four years and have a term of ten years, Compensation and Stock Plan for Directors subject to earlier expiration upon termination of employment. Effective January 2003, the Company adopted the fair value The exercise price of $24.91 was the closing market price of method to value and account for employee stock options the Company’s common stock on the date of the award. using the prospective transition method specified under At the annual meeting of the Company’s stockholders in 2004, SFAS 148, “Accounting for Stock-Based Compensation- the stockholders approved the adoption of the 2004 stock Transition and Disclosure” and accounts for stock based plan (the “2004 Plan”) for the purpose of attracting and compensation according to SFAS 123, “Accounting for retaining executive officers, directors and other key Stock-Based Compensation”. The Company had no options personnel. The 2004 Plan provides for grants of options to eligible for valuation prior to the grant of options in 2003. purchase up to 500,000 shares of common stock as well as The fair value of options granted in 2003, 2004 and 2005 grants of up to 100,000 shares of common stock to directors. was determined at the time of each award using the The 2004 Plan authorizes the Compensation Committee of the Black-Scholes model, a widely used method for valuing Board of Directors to grant options at an exercise price stock based employee compensation, and the following which may not be less than the market value of the common assumptions: (1) Expected Volatility. Because Saul Centers stock on the date the option is granted. common stock is thinly traded, with average daily trading volume averaging less than 50,000 shares (since the Effective April 26, 2004, the Compensation Committee granted Company’s inception), expected volatility is determined using options to purchase a total of 152,500 shares (27,500 shares the entire trading history of the Company’s common stock from incentive stock options and 125,000 shares from (month-end closing prices since its inception), (2) Average nonqualified stock options) to eleven Company officers and Expected Term. The options are assumed to be outstanding to the twelve Company directors (the “2004 Options”). The for a term calculated as the period of time from grant until officers’ 2004 Options vest 25% per year over four years and the midpoint between the full vesting date and expiration have a term of ten years, subject to earlier expiration upon date, (3) Expected Dividend Yield. This rate is a value termination of employment. The directors’ options were management determines after considering the Company’s immediately exercisable. The exercise price of $25.78 was current and historic dividend yield rates, the Company’s yield the closing market price of the Company’s common stock on in relation to other retail REITs and the Company’s market the date of the award. Using the Black-Scholes model, the yield at the grant date, and (4) Risk-free Interest Rate. This Company determined the total fair value of the 2004 Options rate is based upon the market yields of US Treasury to be $360,000, of which $293,000 and $67,000 were the values obligations with maturities corresponding to the average assigned to the officer options and director options expected term of the options at the grant date. The Company respectively. Because the directors’ options vest amortizes the value of options granted, ratably over the immediately, the entire $67,000 was expensed as of the date vesting period, and includes the amounts as compensation of grant. The expense of the officers’ options is being in general and administrative expenses. recognized as compensation expense monthly during the four years the options vest. The 2004 Options are due to The Company established a stock option plan in 1993 (the expire April 25, 2014. “1993 Plan”) for the purpose of attracting and retaining executive officers and other key personnel. The 1993 Plan Effective May 6, 2005, the Compensation Committee granted provides for grants of options to purchase a specified options to purchase a total of 162,500 shares (35,500 shares number of shares of common stock. A total of 400,000 shares from incentive stock options and 127,000 shares from were made available under the 1993 Plan. The 1993 Plan nonqualified stock options) to twelve Company officers and authorizes the Compensation Committee of the Board of to the twelve Company directors (the “2005 Options”). The Directors to grant options at an exercise price which may officers’ 2005 Options vest 25% per year over four years and not be less than the market value of the common stock on have a term of ten years, subject to earlier expiration upon the date the option is granted. On May 23, 2003, the termination of employment. The directors’ options were Compensation Committee granted options to purchase a total immediately exercisable. The exercise price of $33.22 was of 220,000 shares (80,000 shares from incentive stock options the closing market price of the Company’s common stock on and 140,000 shares from nonqualified stock options) to six the date of the award. Using the Black-Scholes model, the Company officers (the “2003 Options”). Following the grant Company determined the total fair value of the 2005 Options of the 2003 Options, no additional shares remained for to be $484,500, of which $413,400 and $71,100 were the values issuance under the 1993 Plan. The 2003 Options vest 25% assigned to the officer options and director options respectively. Because the directors’ options vest N25 Notes to Consolidated Financial Statements immediately, the entire $71,100 was expensed as of the date earnings to the extent such distributions in excess of of grant. The expense of the officers’ options is being earnings exceed the carrying amount of minority interests. recognized as compensation expense monthly during the four years the options vest. The 2005 Options are due to Per Share Data expire May 5, 2015. (See Note 10. Stock Option Plan) Per share data is calculated in accordance with SFAS 128, Pursuant to the 2004 Plan, the Compensation Committee “Earnings Per Share.” Per share data for net income (basic established a Deferred Compensation Plan for Directors for and diluted) is computed using weighted average shares of the benefit of its directors and their beneficiaries. This common stock. Convertible limited partnership units and replaces the Company’s previous Deferred Compensation employee stock options are the Company’s potentially dilutive and Stock Plan for Directors. A director may elect to defer securities. For all periods presented, the convertible limited all or part of his or her director's fees and has the option to partnership units are anti-dilutive. For the years ended have the fees paid in cash, in shares of common stock or in a December 31, 2005, 2004 and 2003 the options are dilutive combination of cash and shares of common stock upon because the average share price of the Company’s common termination from the Board. If the director elects to have stock exceeded the exercise prices. The treasury share fees paid in stock, fees earned during a calendar quarter are method was used to measure the effect of the dilution. aggregated and divided by the common stock’s closing market price on the first trading day of the following quarter to determine the number of shares to be allocated to the Basic and Diluted Shares Outstanding director. As of December 31, 2005, 186,000 shares had been December 31, credited to the directors' deferred fee accounts. (In thousands) 2005 2004 2003 The Compensation Committee has also approved an annual Weighted average common award of shares of the Company’s common stock as shares outstanding – Basic 16,663 16,154 15,591 additional compensation to each director serving on the Effect of dilutive options 107 57 17 Board of Directors as of the record date for the Annual Weighted average common Meeting of Stockholders. The shares are awarded as of shares outstanding – Diluted 16,770 16,211 15,608 each Annual Meeting of Shareholders, and their issuance may not be deferred. Each director was issued 200, 200 and Average Share Price $ 35.20 $ 30.66 $ 25.77 100 shares, for the years ended December 31, 2005, 2004 and 2003, respectively. The shares were valued at the closing Reclassifications stock price on the dates the shares were awarded and Certain reclassifications have been made to the prior year included in general and administrative expenses in the total financial statements to conform to the current year amounts of $80,000, $71,000 and $29,000, for the years ended presentation. The reclassifications have no impact on December 31, 2005, 2004 and 2003, respectively. operating results previously reported.
Minority Interests Legal Contingencies Saul Centers is the sole general partner of the Operating The Company is subject to various legal proceedings and Partnership, owning a 76.1% common interest as of claims that arise in the ordinary course of business. These December 31, 2005. Minority Interests in the Operating matters are generally covered by insurance. While the Partnership are comprised of limited partnership units owned resolution of these matters cannot be predicted with by The Saul Organization. Minority Interests as reflected on certainty, the Company believes the final outcome of such the Balance Sheets are increased for earnings allocated to matters will not have a material adverse effect on the limited partnership interests, distributions reinvested in financial position or the results of operations. Once it has additional units and distributions to minority interests in been determined that a loss is probable to occur, the excess of earnings allocated, and are decreased for limited estimated amount of the loss is recorded in the financial partner distributions. Minority Interests as reflected on the statements. Both the amount of the loss and the point at Statements of Operations represent earnings allocated to which its occurrence is considered probable can be difficult limited partnership interests. Amounts distributed in excess to determine. of the limited partners’ share of earnings, net of limited partner reinvestments of distributions, also increase minority interests expense in the respective period and are classified on the Statements of Operations as Distributions in excess of N26 Notes to Consolidated Financial Statements
Recent Accounting Pronouncements 3. REAL ESTATE ACQUIRED The Emerging Issues Task Force (“EITF”) issued EITF 04-5, last updated on July 15, 2005, “Investors Accounting for an Boca Valley Plaza Investment in a Limited Partnership when the Investor is the On February 13, 2004, the Company acquired Boca Valley General Partner and the Limited Partners have Certain Plaza in Boca Raton, Florida. Boca Valley Plaza is a 121,000 Rights” (“EITF 04-5”), which addresses the General Partner square foot neighborhood shopping center on U.S. Highway 1 in a limited partnership who is presumed to control the in South Florida. The center, constructed in 1988, is 91% partnership unless the Limited Partners have the ability, leased and anchored by a 42,000 square foot Publix through a majority vote, to remove the General Partner supermarket. The property was acquired for a purchase without cause or the ability to effectively participate in price of $17.5 million, subject to the assumption of a $9.2 significant decisions that would be expected to be made in million mortgage. The mortgage assumption was treated as the ordinary course of business. EITF 04-5 is effective as of a non-cash acquisition in the Statement of Cash Flows. June 29, 2005 for new limited partnerships and existing limited partnerships where the partnership agreement has Countryside been modified after that date or for fiscal periods beginning On February 17, 2004, the Company completed the acquisition after December 15, 2005. The Company has not entered into of the 142,000 square foot Safeway-anchored Countryside any new agreements or made any amendments to existing shopping center, its fourth neighborhood shopping center agreements that are covered by EITF 04-5. The Company is investment in Loudoun County, Virginia. The center is 96% evaluating the potential impact of EITF 04-5 with respect to leased and was acquired for a purchase price of $29.7 existing agreements and does not anticipate that the million. adoption of EITF 04-5, if applicable, will have material impact on its financial condition or results of operations. Cruse MarketPlace In December 2004, the FASB issued FAS No. 123 (revised On March 25, 2004, the Company completed the acquisition 2004), “Share-Based Payment” (“FAS No. 123R”), which is a of the 79,000 square foot Publix-anchored, Cruse revision of FAS No. 123, “Accounting for Stock-Based MarketPlace located in Forsyth County, Georgia. Cruse Compensation.” FAS No. 123R supersedes APB Opinion No. MarketPlace was constructed in 2002 and is 97% leased. 25, “Accounting for Stock Issued to Employees,” and amends The center was purchased for $12.6 million subject to the FAS No. 95, “Statement of Cash Flows.” On April 14, 2005, the assumption of an $8.8 million mortgage loan. The mortgage Securities and Exchange Commission announced its decision assumption was treated as a non-cash acquisition in the to delay compliance with FAS No. 123R until the first fiscal Statement of Cash Flows. year following December 15, 2005. Saul Centers therefore will adopt FAS No. 123R as required, effective January 1, Briggs Chaney MarketPlace 2006. FAS No. 123R requires all share-based payments to On April 23, 2004, the Company completed the acquisition of employees, including grants of employee stock options, to be the 197,000 square foot Safeway-anchored Briggs Chaney recorded as an expense based on their fair values. The MarketPlace shopping center located in Silver Spring, grant-date fair value of employee share options and similar Maryland. The center is 98% leased and was acquired for instruments will be estimated using an option-pricing model a purchase price of $27.3 million. adjusted for any unique characteristics of a particular instrument. If an equity award is modified after the grant Ashland Square date, incremental compensation cost will be recognized in an On December 15, 2004, the Company acquired a 19.3 acre amount equal to the excess of the fair value of the modified parcel of land in Dumfries, Prince William County, Virginia, award over the fair value of the original award immediately for a purchase price of $6.3 million. The Company has before the modification. The Company already values stock preliminary plans to develop the parcel into a grocery- option awards using the fair value method and expenses the anchored neighborhood shopping center. The Company option value over the vesting period of the options, in submitted a site plan to Prince William County during the accordance with FAS No. 123. The Company plans to adopt second quarter of 2005 in order to obtain approvals for FAS No. 123R using the modified prospective transition developing a shopping center totaling approximately 160,000 method. The Company anticipates that the adoption of FAS square feet, and is marketing the project to grocers and No. 123R will not have a material impact upon its financial other retail businesses. statements. N27 Notes to Consolidated Financial Statements
Palm Springs Center Application of SFAS 141, “Business Combinations”, On March 3, 2005, the Company completed the acquisition of for Real Estate Acquired the 126,000 square foot Albertson’s-anchored Palm Springs The Company accounts for the acquisition of operating Center located in Altamonte Springs, Florida. The center is properties using the purchase method of accounting in 100% leased and was acquired for a purchase price of $17.5 accordance with SFAS 141, “Business Combinations.” million. The Company allocates the purchase price to various components, such as land, buildings and intangibles related New Market to in-place leases and customer relationships, if applicable, On March 3, 2005, the Company acquired a 7.1 acre parcel as described in Note 2. Significant Accounting Policies-Real of land located in New Market, Maryland for a purchase Estate Investment Properties. Of the combined $58,464,000 price of $500,000. On September 8, 2005, the Company total cost of the operating property acquisitions in 2005 and acquired a 28.4 acre contiguous parcel for a purchase price $89,299,000 in 2004, of which both amounts include the of $1,500,000. The Company has contracted to purchase one properties’ purchase price and closing costs, a total of additional parcel with the intent to assemble acreage for $3,523,000 and $4,403,000, was allocated as lease intangible retail development near a major interstate highway assets and included in lease acquisition costs at December interchange. 31, 2005 and December 31, 2004, respectively. Each year’s lease intangible assets are being amortized over the Lansdowne Town Center remaining periods of the leases acquired, a weighted average term of 13 and 9 years, for 2005 and 2004, During the first quarter of 2005, the Company received respectively. The value of below market leases totaled approval of a zoning submission to Loudoun County which $2,203,000 and $1,094,000, are being amortized over a will allow the development of a neighborhood shopping weighted average term of 19 and 14 years, for 2005 and 2004, center to be known as Lansdowne Town Center, within the respectively, and are included in deferred income. The value Lansdowne Community in northern Virginia. On March 29, of above market leases totaled $151,000 and $497,000, are 2005, the Company finalized the acquisition of an additional being amortized over a weighted average term of 5 years, 4.5 acres of land to bring the total acreage of the for both periods, and are included as a deferred asset in development parcel to 23.4 acres (including the 18.9 acres accounts receivable. acquired in 2002). The additional purchase price was approximately $1.0 million. The Company has received final As of December 31, 2005 and 2004, the gross carrying amount site plan approval from the County, and has commenced of lease intangible assets included in lease acquisition costs construction of the 191,000 square foot retail center during was $9,121,000 and $5,598,000, respectively, and accumulated late 2005. A lease was executed with Harris Teeter for a amortization was $3,088,000 and $1,584,000, respectively. 55,000 square foot grocery store to anchor this development. Total amortization of these assets was $1,504,000, $1,456,000 and $128,000, for the years ended December 31, 2005, 2004 Jamestown Place and 2003, respectively. As of December 31, 2005 and 2004, On November 17, 2005, the Company completed the the gross carrying amount of below market lease intangible acquisition of the 96,000 square foot Publix-anchored assets included in deferred income was $3,362,000 and Jamestown Place located in Altamonte Springs, Florida. $1,159,000, respectively, and accumulated amortization was The center is 99% leased and was acquired for a purchase $415,000 and $148,000, respectively. Total amortization of price of $14.8 million. these assets was $267,000, $136,000 and $12,000, for the years ended December 31, 2005, 2004 and 2003, respectively. As of December 31, 2005 and 2004, the gross carrying amount Seabreeze Plaza of above market lease intangible assets included in accounts On November 30, 2005, the Company completed the receivable was $689,000 and $538,000, respectively, and acquisition of the 147,000 square foot Publix-anchored accumulated amortization was $299,000 and $142,000 Seabreeze Plaza located in Palm Harbor, Florida. The center respectively. Total amortization of these assets was $157,000, is 99% leased and was acquired for a purchase price of $25.9 $137,000 and $5,000, for the years ended December 31, 2005, million subject to the assumption of a $13.6 million mortgage 2004 and 2003, respectively. loan (See Note 5. Mortgage Notes Payable). The mortgage assumption was treated as a non-cash acquisition in the Statement of Cash Flows. N28 Notes to Consolidated Financial Statements
As of December 31, 2005, the scheduled amortization 4. MINORITY INTERESTS - HOLDERS OF of intangible assets and deferred income related to CONVERTIBLE LIMITED PARTNERSHIP in place leases are as follows: UNITS IN THE OPERATING PARTNERSHIP The Saul Organization has a 23.9% limited partnership Amortization of Intangible Assets and interest, represented by 5,310,000 convertible limited Deferred Income Related to In-place Leases partnership units, in the Operating Partnership, as of December 31, 2005. These convertible limited partnership Lease Above Below units are convertible into shares of Saul Centers’ common acquisition market market stock, at the option of the unitholders, on a one-for-one basis, (In thousands) costs leases leases Total provided the rights may not be exercised at any time that The 2006 $ (2,051) $ (130) $ 445 $ (1,736) Saul Organization beneficially owns, directly or indirectly, in 2007 (1,257) (98) 274 (1,081) the aggregate more than 24.9% of the value of the 2008 (764) (82) 205 (641) outstanding common stock and preferred stock of Saul 2009 (478) (45) 181 (342) Centers (the “Equity Securities”). The limited partnership 2010 (352) (33) 167 (218) units were not convertible as of December 31, 2005 because Thereafter (1,131) (2) 1,675 542 the Saul Organization owned in excess of 24.9% of the Company’s Equity Securities. Total $ (6,033) $ (390) $ 2,947 $ (3,476) The Operating Partnership issued 110,910 and 11,557 limited The results of operations of the acquired properties are partnership units pursuant to the Dividend Reinvestment and included in the consolidated statements of operations as Stock Purchase Plan at a weighted average discounted price of the acquisition date. The following unaudited pro-forma of $35.15 and $27.66 per share during the years ended combined condensed statements of operations set forth December 31, 2005 and 2004, respectively. the consolidated results of operations for the years ended The impact of The Saul Organization's 23.9% limited December 31, 2005 and 2004, respectively, as if the above partnership interest in the Operating Partnership is reflected described operating property acquisitions had occurred as minority interests in the accompanying consolidated on January 1, 2005 and 2004, respectively. The unaudited financial statements. Fully converted partnership units and pro-forma information does not purport to be indicative of diluted weighted average shares outstanding for the years the results that actually would have occurred if the ended December 31, 2005, 2004 and 2003, were 22,003,000, combinations had been in effect for the years ended 21,405,000 and 20,790,000, respectively. December 31, 2005 and 2004, respectively.
Pro-Forma Consolidated Condensed Statements of Operations (unaudited) Year ended December 31, (In thousands, except per share data) 2005 2004 Total revenue $130,461 $117,583 Net income available to common shareholders $ 21,695 $ 19,027 Net income per common share – basic $ 1.30 $ 1.18 Net income per common share – diluted $ 1.29 $ 1.17 N29 Notes to Consolidated Financial Statements
5. MORTGAGE NOTES PAYABLE, REVOLVING acquisitions, certain developments and redevelopments. The CREDIT FACILITY, INTEREST EXPENSE line has a three-year term and provides for an additional one- AND AMORTIZATION OF DEFERRED year extension at the Company’s option, subject to the DEBT COSTS Company’s satisfaction of certain conditions. Until January 27, 2007, certain or all of the lenders may, upon request by The Company’s outstanding debt, including amounts owed the Company and payment of certain fees, increase the under the Company’s revolving credit facility, totaled revolving credit facility line by up to $50,000,000. Letters $482,431,000 at December 31, 2005, of which $471,931,000 of credit may be issued under the revolving credit facility. was fixed rate debt and $10,500,000 was variable rate debt. The Company closed on two new fixed-rate, non-recourse At the prior year’s end, notes payable totaled $453,646,000, financings during the second quarter of 2005. The first loan all of which was fixed rate debt. At December 31, 2005, is a refinancing of the $9,200,000, 6.82% interest rate the Company had a $150 million unsecured revolving credit mortgage loan assumed during the February 2004 acquisition facility with $10,500,000 outstanding borrowings. The facility of Boca Valley Plaza. The new loan is a 15-year, $13,000,000 is due to mature January 2008 and requires monthly interest fixed-rate mortgage loan collateralized by Boca Valley Plaza. payments, if applicable, at a rate of LIBOR plus a spread of The loan requires monthly principal and interest payments 1.40% to 1.625% (determined by certain debt service based upon a fixed interest rate of 5.60% and a 30-year coverage and leverage tests) or upon the bank’s reference amortization schedule. A final payment of $9,149,000 will be rate at the Company’s option. Loan availability is determined due at loan maturity, May 2020. The second loan is a by operating income from the Company’s unencumbered permanent financing of Palm Springs Center, acquired in properties, which, as of December 31, 2005 supported line March 2005. The loan is a 15-year, $12,500,000 fixed-rate availability of $83,000,000 leaving $72,500,000 available for mortgage loan collateralized by Palm Springs Center. The working capital uses. An additional $67,000,000 was loan requires monthly principal and interest payments based available for funding working capital and operating property upon a fixed interest rate of 5.30% and a 25-year amortization acquisitions supported by the unencumbered properties’ schedule. A final payment of $7,075,000 will be due at loan internal cash flow growth and operating income of future maturity, June 2020. On November 30, 2005 the Company acquisitions. assumed an existing $13,600,000 loan upon the acquisition of Seabreeze Plaza. The loan requires fixed monthly principal Saul Centers has guaranteed a portion of a mortgage note and interest payments based upon a 5.28% interest rate and payable totaling $4,500,000, the amount of which is 25-year amortization. A final payment of $10,531,000 will be considered a recourse obligation to Saul Centers as of due at loan maturity, May 2014. December 31, 2005. The guarantee is expected to be released upon the achievement of specified leasing In December 2005, the Company entered into a rate lock thresholds at a recently redeveloped property. Saul Centers agreement and made application for a 15-year, $40,000,000 is also a guarantor of the revolving credit facility. The fixed-rate mortgage loan to be collateralized by Lansdowne balance of the mortgage notes payable totaling $467,431,000 Town Center. The rate lock agreement set the interest rate are non-recourse. at 5.62%, contingent upon meeting certain construction and leasing criteria prior to loan funding, projected to occur in During 2005 the Company refinanced its revolving credit February 2007. The Company paid a loan deposit fee of facility, refinanced an existing mortgage loan, completed a $850,000 which is refundable, less expenses, if the parties new mortgage financing and assumed an existing mortgage are unable to close on the financing. loan upon the acquisition of a shopping center. On January 28, 2005 the Company executed a $150 million unsecured The following is a summary of notes payable as of December revolving credit facility, an expansion of the $125 million 31, 2005 and 2004: agreement in place as of December 31, 2004. The facility is intended to provide working capital and funds for N30 Notes to Consolidated Financial Statements
Notes Payable December 31, Interest Scheduled (Dollars in thousands) 2005 2004 Rate * Maturity * Fixed rate mortgages: $ 91,203 (a) $ 94,794 8.00% Dec-2011 126,637 (b) 129,883 7.67% Oct-2012 32,185 (c) 33,138 7.88% Jan-2013 8,520 (d) 8,699 5.77% Jul-2013 13,554 (e) – 5.28% May-2014 12,712 (f) 13,057 8.33% Jun-2015 40,627 (g) 41,324 6.01% Feb-2018 46,479 (h) 47,375 5.88% Jan-2019 15,040 (i) 15,335 5.76% May-2019 20,774 (j) 21,185 5.62% Jul-2019 20,514 (k) 20,906 5.79% Sep-2019 18,407 (l) 18,750 5.22% Jan-2020 12,901 (m) 9,200 5.60% May-2020 12,378 (n) – 5.30% Jun-2020 Total fixed rate 471,931 453,646 6.90% 9.3 Years Variable rate loan: Revolving credit facility 10,500 (o) – LIBOR + 1.5 % Jan-2008 Total variable rate 10,500 – 5.82% 2.1 Years Total notes payable $ 482,431 $ 453,646 6.87% 9.2 Years
* Interest rate and scheduled maturity data presented as of December 31, 2005. Totals computed using weighted averages.
(a) The loan is collateralized by Avenel Business Park, Van Ness Square, Ashburn Village, Leesburg Pike, Lumberton Plaza and Village Center. The loan has been increased on four occasions since its inception in 1997. The 8.00% blended interest rate is the weighted average of the initial loan rate and additional borrowing rates. The loan requires equal monthly principal and interest payments of $920,000 based upon a weighted average 23-year amortization schedule and a final payment of $63,153,000 at loan maturity. Principal of $3,591,000 was amortized during 2005. (b) The loan is collateralized by nine shopping centers (Seven Corners, Thruway, White Oak, Hampshire Langley, Great Eastern, Southside Plaza, Belvedere, Giant and Ravenwood) and requires equal monthly principal and interest payments of $1,103,000 based upon a 25-year amortization schedule and a final payment of $97,403,000 at loan maturity. Principal of $3,246,000 was amortized during 2005. (c) The loan is collateralized by 601 Pennsylvania Avenue and requires equal monthly principal and interest payments of $294,000 based upon a 25-year amortization schedule and a final payment of $22,961,000 at loan maturity. Principal of $953,000 was amortized during 2005. (d) The loan is collateralized by Cruse MarketPlace and requires equal monthly principal and interest payments of $56,000 based upon an amortization schedule of approximately 24 years and a final payment of $6,830,000 at loan maturity. Principal of $179,000 was amortized during 2005. (e) The loan is collateralized by Seabreeze Plaza and requires equal monthly principal and interest payments of $84,000 based upon a 25-year amortization schedule and a final payment of $10,531,000 at loan maturity. Principal of $25,000 was amortized during 2005. (f) The loan is collateralized by Shops at Fairfax and Boulevard shopping centers and requires monthly principal and interest payments of $118,000 based upon a 22-year amortization schedule and a final payment of $7,630,000 at loan maturity. Principal of $345,000 was amortized during 2005. N31 Notes to Consolidated Financial Statements
(g) The loan is collateralized by Washington Square and requires equal monthly principal and interest payments of $264,000 based upon a 27.5-year amortization schedule and a final payment of $28,012,000 at loan maturity. Principal of $697,000 was amortized during 2005. (h) The loan, consisting of two notes dated December 2003 and two notes dated February and December 2004, is currently collateralized by four shopping centers, Broadlands Village (Phases I & II), The Glen and Kentlands Square, and requires equal monthly principal and interest payments of $306,000 (beginning February 1, 2005; prior to that date, payments totaled $256,000 per month) based upon a 25-year amortization schedule and a final payment of $28,393,000 at loan maturity. Principal of $896,000 was amortized during 2005. (i) The loan is collateralized by Olde Forte Village and requires equal monthly principal and interest payments of $98,000 based upon a 25-year amortization schedule and a final payment of $8,985,000 at loan maturity. Principal of $295,000 was amortized during 2005. (j) The loan is collateralized by Countryside and requires equal monthly principal and interest payments of $133,000 based upon a 25- year amortization schedule and a final payment of $12,288,000 at loan maturity. Principal of $411,000 was amortized during 2005. (k) The loan is collateralized by Briggs Chaney MarketPlace and requires equal monthly principal and interest payments of $133,000 based upon a 25-year amortization schedule and a final payment of $12,192,000 at loan maturity. Principal of $392,000 was amortized during 2005. (l) The loan is collateralized by Shops at Monocacy and requires equal monthly principal and interest payments of $112,000 based upon a 25-year amortization schedule and a final payment of $10,568,000 at loan maturity. Principal of $343,000 was amortized during 2005. (m) The loan is collateralized by Boca Valley Plaza and requires equal monthly principal and interest payments of $75,000 based upon a 30-year amortization schedule and a final payment of $9,149,000 at loan maturity. Principal of $99,000 was amortized during 2005. The previous loan was repaid in 2005 with proceeds from this financing. (n) The loan is collateralized by Palm Springs Center and requires equal monthly principal and interest payments of $75,000 based upon a 25-year amortization schedule and a final payment of $7,075,000 at loan maturity. Principal of $122,000 was amortized during 2005. (o) The loan is an unsecured revolving credit facility totaling $150,000,000. Loan availability for working capital and general corporate uses is determined by operating income from the Company’s unencumbered properties, with a portion available only for funding qualified operating property acquisitions. Interest expense is calculated based upon the 1,2,3 or 6 month LIBOR rate plus a spread of 1.40% to 1.625% (determined by certain debt service coverage and leverage tests) or upon the bank’s reference rate at the Company’s option. The line may be extended one year with payment of a fee of 1/4% at the Company’s option. Monthly payments, if applicable, are interest only and will vary depending upon the amount outstanding and the applicable interest rate for any given month.
The December 31, 2005 and 2004 depreciation adjusted cost As of December 31, 2005, the Company was in compliance of properties collateralizing the mortgage notes payable with all such covenants. totaled $467,015,000 and $420,320,000, respectively. The Notes payable at December 31, 2005 and 2004, totaling Company’s credit facility requires the Company and its $169,322,000 and $163,022,000, respectively, are guaranteed subsidiaries to maintain certain financial covenants. As of by members of The Saul Organization. As of December 31, December 31, 2005, the material covenants required the 2005, the scheduled maturities of all debt including scheduled Company, on a consolidated basis, to: principal amortization for years ended December 31, are as • limit the amount of debt so as to maintain a gross asset follows: value in excess of liabilities of at least $400 million; • limit the amount of debt as a percentage of gross asset value (leverage ratio) to less than 60%; Debt Maturity Schedule • limit the amount of debt so that interest coverage will (In thousands) exceed 2.1 to 1 on a trailing four quarter basis; and 2006 $ 12,991 • limit the amount of debt so that interest, scheduled 2007 13,967 principal amortization and preferred dividend coverage 2008 25,491 exceeds 1.55 to 1. 2009 16,149 2010 17,369 Thereafter 396,464 Total $482,431 N32 Notes to Consolidated Financial Statements
base annual rent and require the payment of real estate Interest Expense and Amortization taxes on the underlying land. The leases will expire between of Deferred Debt Costs 2058 and 2068. Reflected in the accompanying consolidated Year ended December 31, financial statements is minimum ground rent expense of (In thousands) 2005 2004 2003 $164,000 for each of the years ended December 31, 2005, 2004 and 2003, respectively. The future minimum rental Interest incurred $ 32,304 $ 29,320 $ 27,154 commitments under these ground leases are as follows: Amortization of deferred debt costs 1,161 929 801 Capitalized interest (3,258) (3,227) (1,382) Ground Lease Rental Commitments Total $ 30,207 $ 27,022 $ 26,573 Annually Total (In thousands) 2006-2008 2009 2010 Thereafter 6. LEASE AGREEMENTS Beacon Center $ 53 $ 53 $ 53 $ 3,077 Lease income includes primarily base rent arising from Olney 51 52 56 4,265 noncancelable commercial leases. Base rent (including Southdale 60 60 60 3,425 straight-lined rent) for the years ended December 31, 2005, Total $ 164 $ 165 $ 169 $ 10,767 2004 and 2003, amounted to $99,448,000, $91,125,000 and $78,167,000, respectively. Future contractual payments under In addition to the above, Flagship Center consists of two noncancelable leases for years ended December 31, are as developed out parcels that are part of a larger adjacent follows: community shopping center formerly owned by The Saul Organization and sold to an affiliate of a tenant in 1991. Future Contractual Payments The Company has a 90-year ground leasehold interest which commenced in September 1991 with a minimum rent (In thousands) of one dollar per year. Countryside Shopping Center was 2006 $102,138 acquired in February, 2004. Because of certain land use 2007 94,545 considerations, approximately 0.54 of the 16 acres acquired 2008 83,683 is held under a 99-year ground lease. The lease requires the 2009 71,256 Company to pay minimum rent of one dollar per year as well 2010 59,713 as its pro-rata share of the real estate taxes. Thereafter 283,396 The Company’s corporate headquarters lease, which Total $694,731 commenced in March 2002, is leased by a member of The Saul Organization. The 10-year lease provides for base rent The majority of the leases also provide for rental increases escalated at 3% per year, with payment of a pro-rata share of and expense recoveries based on fixed annual increases or operating expenses over a base year amount. The Company increases in the Consumer Price Index and increases in and The Saul Organization entered into a Shared Services operating expenses. The expense recoveries generally are Agreement whereby each party pays an allocation of total payable in equal installments throughout the year based on rental payments on a percentage proportionate to the estimates, with adjustments made in the succeeding year. number of employees employed by each party. The Expense recoveries for the years ended December 31, 2005, Company’s rent payments for the years ended December 31, 2004 and 2003 amounted to $20,027,000, $16,712,000 and 2005, 2004 and 2003 were $661,000, $621,000 and $569,000, $14,438,000, respectively. In addition, certain retail leases respectively. Expenses arising from the lease are included provide for percentage rent based on sales in excess of the in general and administrative expense (see Note 9 – Related minimum specified in the tenant's lease. Percentage rent Party Transactions). amounted to $2,057,000, $1,635,000 and $1,695,000, for the years ended December 31, 2005, 2004 and 2003, respectively. 8. STOCKHOLDERS' EQUITY (DEFICIT) AND MINORITY INTERESTS 7. LONG-TERM LEASE OBLIGATIONS The consolidated statement of operations for the year ended Certain properties are subject to noncancelable long-term December 31, 2005 includes a charge for minority interests of leases which apply to land underlying the Shopping Centers. $7,798,000, consisting of $6,937,000 related to The Saul Certain of the leases provide for periodic adjustments of the N33 Notes to Consolidated Financial Statements
Organization’s share of the net income for the year and The Chairman and Chief Executive Officer, the President, $861,000 related to distributions to minority interests in the Senior Vice President- General Counsel and the Vice excess of allocated net income for the year. The charge for President-Chief Accounting Officer of the Company are also the year ended December 31, 2004 was $8,105,000, consisting officers of various members of The Saul Organization and of $6,386,000 related to The Saul Organization’s share of the their management time is shared with The Saul Organization. net income for the year and $1,719,000 related to distributions Their annual compensation is fixed by the Compensation to minority interests in excess of allocated net income for the Committee of the Board of Directors, with the exception year. The charge for the year ended December 31, 2003 was of the Vice President-Chief Accounting Officer whose $8,086,000, consisting of $6,495,000 related to The Saul share of annual compensation allocated to the Company is Organization’s share of the net income for the year and determined by the shared services agreement (described $1,591,000 related to distributions to minority interests in below). excess of allocated net income for the year. The Company participates in a multiemployer profit sharing On July 16, 2003, the Company filed a shelf registration retirement plan with other entities within The Saul statement (the “Shelf Registration Statement”) with the SEC Organization which covers those full-time employees who relating to the future offering of up to an aggregate of $100 meet the requirements as specified in the plan. Beginning million of preferred stock and depositary shares. On January 1, 2002, only employer contributions are made to the November 5, 2003 the Company sold 3,500,000 depositary plan. Each participant who is entitled to be credited with at shares, each representing 1/100th of a share of 8% Series A least one hour of service on or after January 1, 2002, shall Cumulative Redeemable Preferred Stock. The underwriters be 100% vested in his or her employer contribution account exercised an over-allotment option, purchasing an additional and no portion of such account shall be forfeitable. Employer 500,000 depositary shares on November 26, 2003. contributions, included in general and administrative expense or property operating expenses in the consolidated The depositary shares may be redeemed, in whole or in part, statements of operations, at the discretionary amount of up at the $25.00 liquidation preference at the Company’s option to six percent of the employee’s cash compensation, subject on or after November 5, 2008. The depositary shares will pay to certain limits, were $266,000, $269,000 and $199,000 for an annual dividend of $2.00 per share, equivalent to 8% of the 2005, 2004 and 2003, respectively. There are no past service $25.00 liquidation preference. The first dividend, paid on costs associated with the plan since it is of the defined- January 15, 2004 was for less than a full quarter and covered contribution type. the period from November 5 through December 31, 2003. The Series A preferred stock has no stated maturity, is not The Company also participates in a multiemployer subject to any sinking fund or mandatory redemption and nonqualified deferred plan with entities in The Saul is not convertible into any other securities of the Company. Organization which covers those full-time employees who Investors in the depositary shares generally have no voting meet the requirements as specified in the plan. The plan, rights, but will have limited voting rights if the Company fails which can be modified or discontinued at any time, requires to pay dividends for six or more quarters (whether or not participating employees to defer 2% of their compensation declared or consecutive) and in certain other events. over a specified amount. For the years ended December 31, 2005, 2004 and 2003, the Company was required to contribute 9. RELATED PARTY TRANSACTIONS three times the amount deferred by employees. The Company’s expense, included in general and administrative Chevy Chase Bank, an affiliate of The Saul Organization, expense, totaled $118,000, $650,000 and $31,000, for the years leases space in 15 of the Company’s properties. Total rental ended December 31, 2005, 2004 and 2003, respectively. All income from Chevy Chase Bank amounted to $1,768,000, amounts deferred by employees and the Company are fully $1,733,000 and $1,495,000, for the years ended December 31, vested. The cumulative unfunded liability under this plan 2005, 2004 and 2003, respectively. As of December 31, 2005 was $570,000 and $452,000 at December 31, 2005 and 2004, and 2004, accounts receivable and accrued income, net respectively, and is included in accounts payable, accrued included $8,000 and $4,000, respectively, from various Chevy expenses and other liabilities in the consolidated balance Chase Bank leases. sheets. The Company utilizes Chevy Chase Bank for its various The Company has entered into a shared services agreement checking accounts and as of December 31, 2005 had (the “Agreement”) with The Saul Organization that provides $7,723,000 deposited in cash and short-term investment for the sharing of certain personnel and ancillary functions accounts. such as computer hardware, software, and support services and certain direct and indirect administrative personnel. The method for determining the cost of the shared services is N34 Notes to Consolidated Financial Statements provided for in the Agreement and is based upon head count On May 23, 2003, the Compensation Committee granted estimates of usage or estimates of time incurred, as options to purchase a total of 220,000 shares (80,000 shares applicable. Senior management has determined that the final from incentive stock options and 140,000 shares from allocations of shared costs are reasonable. The terms of the nonqualified stock options) to six Company officers (the Agreement and the payments made thereunder are reviewed “2003 Options”). The 2003 Options vest 25% per year over annually by the Audit Committee of the Board of Directors, four years and have a term of ten years, subject to earlier which consists entirely of independent directors. Billings expiration upon termination of employment. The exercise by The Saul Organization for the Company’s share of these price of $24.91 was the market trading price of the Company’s ancillary costs and expenses for the years ended December common stock at the time of the award. As a result of the 31, 2005, 2004 and 2003, which included rental payments for 2003 Options grant, no further shares were available under the Company’s headquarters lease (see Note 7. Long Term the 1993 Plan. Lease Obligations), totaled $3,462,000, $3,139,000 and At the annual meeting of the Company’s stockholders in 2004, $2,628,000, respectively. The amounts are expensed when the stockholders approved the adoption of the 2004 stock incurred and are primarily reported as general and plan (the “2004 Plan”) for the purpose of attracting and administrative expenses in these consolidated financial retaining executive officers, directors and other key statements. As of December 31, 2005 and 2004, accounts personnel. The 2004 Plan provides for grants of options to payable, accrued expenses and other liabilities included purchase up to 500,000 shares of common stock as well as $305,000 and $259,000, respectively, represent billings due grants of up to 100,000 shares of common stock to directors. to The Saul Organization for the Company’s share of these The 2004 Plan authorizes the Compensation Committee of ancillary costs and expenses. the Board of Directors to grant options at an exercise price On January 23, 2004, the Company purchased a 3.4 acre site, which may not be less than the market value of the common adjacent to the Company’s Kentlands Square property, from a stock on the date the option is granted. subsidiary of Chevy Chase Bank for $1,425,000. The Company Effective April 26, 2004, the Compensation Committee granted developed this property into a 41,000 square foot retail/office options to purchase a total of 152,500 shares (27,500 shares property known as Kentlands Place. The purchase price of of incentive stock options and 125,000 shares of nonqualified the property was determined by the average of two stock options) to eleven Company officers and to the twelve independent third party appraisals which were contracted, Company directors (the “2004 Options”). The officers’ 2004 one on behalf of the Company and one on behalf of Chevy Options vest 25% per year over four years and have a term Chase Bank. of ten years, subject to earlier expiration upon termination of employment. The directors’ options are exercisable 10. STOCK OPTION PLAN immediately. The exercise price of $25.78 was the market The Company established a stock option plan in 1993 (the trading price of the Company’s common stock at the time “1993 Plan”) for the purpose of attracting and retaining of the award. executive officers and other key personnel. The 1993 Plan Effective May 6, 2005, the Compensation Committee granted provided for grants of options to purchase a specified options to purchase a total of 162,500 shares (35,500 shares number of shares of common stock. A total of 400,000 shares of incentive stock options and 127,000 shares of nonqualified were made available under the 1993 Plan. The 1993 Plan stock options) to twelve Company officers and to the twelve authorizes the Compensation Committee of the Board of Company directors (the “2005 Options”). The officers’ 2005 Directors to grant options at an exercise price which may not Options vest 25% per year over four years and have a term be less than the market value of the common stock on the of ten years, subject to earlier expiration upon termination date the option is granted. of employment. The directors’ options are exercisable During 1993 and 1994, the Compensation Committee granted immediately. The exercise price of $33.22 was the market options to purchase a total of 180,000 shares (90,000 shares trading price of the Company’s common stock at the time from incentive stock options and 90,000 shares from of the award. nonqualified stock options) to five Company officers. The The following table summarizes the status of the 2005, 2004 options vested 25% per year over four years, had an exercise and 2003 Option grants and the value of the options price of $20 per share and a term of ten years, subject to expensed and included in general and administrative earlier expiration upon termination of employment. No expense in the Consolidated Statements of Operations: compensation expense was recognized as a result of these grants. As of December 31, 2004, no 1993 and 1994 options remained unexercised. N35 Notes to Consolidated Financial Statements
Stock Options Officers Directors Total Grant date 05/23/2003 04/26/2004 05/06/2005 04/26/2004 05/06/2005 Total grant 220,000 122,500 132,500 30,000 30,000 535,000 Vested 110,000 30,625 – 30,000 30,000 200,625 Exercised 20,000 1,875 – – – 21,875 Remaining unexercised 200,000 120,625 132,500 30,000 30,000 513,125 Exercise price $ 24.91 $ 25.78 $ 33.22 $ 25.78 $ 33.22 Volatility 0.175 0.183 0.207 0.183 0.198 Expected life (years) 7.0 7.0 8.0 5.0 10.0 Assumed yield 7.00% 5.75% 6.37% 5.75% 6.91% Risk-free rate 4.00% 4.05% 4.15% 3.57% 4.28% Total value $ 332,200 $ 292,775 $ 413,400 $ 66,600 $ 71,100 $ 1,176,075 Expensed in 2003 50,000 – – – – 50,000 Expensed in 2004 83,000 50,000 – 66,600 – 199,600 Expensed in 2005 83,000 73,000 69,000 – 71,100 296,100
The table below summarizes the option activity for the years 2005, 2004 and 2003: 2005 2004 2003 Wtd Avg Wtd Avg Wtd Avg Shares Exercise Price Shares Exercise Price Shares Exercise Price Outstanding at January 1 352,500 $ 25.29 220,000 $ 24.91 93,210 $ 20.00 Granted 162,500 33.22 152,500 25.78 220,000 24.91 Exercised (1,875) 25.78 (20,000) 24.91 (93,210) 20.00 Expired/Forfeited – – – – – – Outstanding December 31 513,125 27.80 352,500 25.29 220,000 24.91 Exercisable at December 31 178,750 26.59 65,000 25.31 – – The weighted average remaining contractual life of the Company’s options is 8.3 years at December 31, 2005.
11. NON-OPERATING ITEMS 12. FAIR VALUE OF FINANCIAL INSTRUMENTS Gain on Sale of Property Statement of Financial Accounting Standards No. 107, The gain on sale of property of $572,000 in 2004 represents “Disclosure about Fair Value of Financial Instruments,” the Company’s share of the gain recognized as a result of a requires disclosure about the fair value of financial condemnation of a portion of land at the Company’s White instruments. The carrying values of cash and cash Oak shopping center for road improvements. The gain on equivalents, accounts receivable, accounts payable and sale of property of $182,000 in 2003 represents the gain accrued expenses are reasonable estimates of their fair value. recognized as a result of a condemnation of a portion of Based upon management’s estimate of borrowing rates and land at the Company’s Avenel Business Park property for loan terms currently available to the Company for fixed rate improvement of an interchange on I-270, adjacent to the financing, the fair value of the fixed rate notes payable is in property. There were no property dispositions in 2005. excess of the $471,931,000 and $453,646,000 carrying value at December 31, 2005 and 2004, respectively. Management estimates that the fair value of these fixed rate notes payable, assuming long term interest rates of approximately 5.65% and 5.50%, would be approximately $501,550,000 and $474,993,000, as of December 31, 2005 and 2004, respectively. N36 Notes to Consolidated Financial Statements
13. COMMITMENTS AND CONTINGENCIES other expenses. All expenses of the Plan are paid by the Company. The Operating Partnership also maintains a similar Neither the Company nor the Current Portfolio Properties dividend reinvestment plan that mirrors the Plan, which are subject to any material litigation, nor, to management's allows limited partnership interests the opportunity to buy knowledge, is any material litigation currently threatened additional limited partnership units. against the Company, other than routine litigation and administrative proceedings arising in the ordinary course The Company paid common stock distributions of $1.60 per of business. Management believes that these items, share during 2005 and $1.56 per share during 2004 and 2003 individually or in the aggregate, will not have a material and paid preferred stock dividends of $2.00 and $1.811 per adverse impact on the Company or the Current Portfolio depositary share during 2005 and 2004. No preferred stock Properties. dividends were paid during 2003. For the common stock dividends paid, $1.520, $1.248 and $1.284 per share, 14. DISTRIBUTIONS represented ordinary dividend income and $0.080, $0.312 and $0.276 per share, represented return of capital to the In December 1995, the Company established a Dividend shareholders for the years 2005, 2004 and 2003, respectively. Reinvestment and Stock Purchase Plan (the “Plan”), to allow All of the preferred stock dividends paid were considered its stockholders and holders of limited partnership interests ordinary dividend income. an opportunity to buy additional shares of common stock by reinvesting all or a portion of their dividends or distributions. The following summarizes distributions paid during the years The Plan provides for investing in newly issued shares of ended December 31, 2005, 2004 and 2003, and includes common stock at a 3% discount from market price without activity in the Plan as well as limited partnership units issued payment of any brokerage commissions, service charges or from the reinvestment of unit distributions:
Total Distributions to Dividend Reinvestments (Dollars in thousands) Limited Common Preferred Common Partnership Stock Shs Units Discounted Stockholders Stockholders Unitholders Issued Issued Share Price Distributions during 2005 October 31 $ 2,000 $ 7,042 $ 2,207 108,133 57,875 $ 33.95 July 29 2,000 6,668 2,081 91,353 50,483 36.67 April 29 2,000 6,436 2,029 158,607 – 32.50 January 31 2,000 6,396 2,028 97,401 2,552 32.40 Total 2005 $ 8,000 $ 26,542 $ 8,345 455,494 110,910
Distributions during 2004 October 29 $ 2,000 $ 6,342 $ 2,028 116,006 2,590 $ 31.53 July 30 2,000 6,296 2,027 117,334 2,769 29.10 April 30 2,000 6,236 2,026 140,253 3,270 24.25 January 30 1,244 6,187 2,024 123,689 2,928 26.69 Total 2004 $ 7,244 $ 25,061 $ 8,105 497,282 11,557
Distributions during 2003 October 31 $ – $ 6,135 $ 2,023 129,319 2,919 $ 26.38 July 31 – 6,088 2,023 126,862 2,847 26.67 April 30 – 6,021 2,020 139,576 3,262 22.88 January 31 – 5,927 2,020 156,413 3,412 21.49 Total 2003 $ – $ 24,171 $ 8,086 552,170 12,440 N37 Notes to Consolidated Financial Statements
In December 2005, 2004 and 2003, the Board of Directors of stock dividends of $0.50, $0.50 and $0.31 per depositary share, the Company authorized a distribution of $0.42, $0.39 and to holders of record on January 3, 2006, January 3, 2005 $0.39 per common share payable in January 2006, 2005 and and January 2, 2004, respectively. As a result, $2,000,000, 2004, to holders of record on January 17, 2006, January 17, $2,000,000 and $1,244,000, were paid to preferred 2005 and January 16, 2004, respectively. As a result, shareholders on January 13, 2006, January 14, 2005 and $7,089,000, $6,396,000 and $6,187,000, were paid to common January 15, 2004, respectively. These amounts are reflected shareholders on January 31, 2006, January 31, 2005 and as a reduction of stockholders' equity in the case of common January 30, 2004, respectively. Also, $2,230,000, $2,028,000 stock and preferred stock dividends and minority interests and $2,024,000, were paid to limited partnership unitholders deductions in the case of limited partner distributions and on January 31, 2006, January 31, 2005 and January 30, 2004 are included in dividends and distributions payable in the ($0.42, $0.39 and $0.39 per Operating Partnership unit), accompanying consolidated financial statements. respectively. The Board of Directors authorized preferred
15. INTERIM RESULTS (UNAUDITED) The following summary presents the results of operations of the Company for the quarterly periods of calendar years 2005 and 2004.
(In thousands, except per share amounts) 2005 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Revenue $ 30,307 $ 30,752 $ 33,182 $ 32,774 Operating income before minority interests and gain on sale of property 8,639 8,952 9,694 9,740 Net income 6,610 6,871 7,856 7,890 Net income available to common stockholders 4,610 4,871 5,856 5,890 Net income available to common stockholders per share (basic & diluted) 0.28 0.29 0.35 0.35
2004 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Revenue $ 26,341 $ 27,888 $ 29,044 $ 29,569 Operating income before minority interests and gain on sale of property 8,329 8,329 8,793 8,256 Net income 6,305 6,286 7,355 (a) 6,228 Net income available to common stockholders 4,305 4,286 5,355 4,228 Net income available to common stockholders per share (basic & diluted) (b) 0.27 0.27 0.33 0.26 (a) Includes $572 gain on land condemnation at White Oak. (b) The sum of the quarterly net income per common share-diluted, $1.13, differs from the annual net income per common share-diluted, $1.12, due to rounding. N38 Notes to Consolidated Financial Statements
16. BUSINESS SEGMENTS The Company has two reportable business segments: Shopping Centers and Office Properties. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company evaluates performance based upon income from real estate for the combined properties in each segment.
Shopping Office Corporate Consolidated (In thousands) Centers Properties and Other Totals 2005 Real estate rental operations: Revenue $ 90,592 $ 35,762 $ 661 $ 127,015 Expenses (17,221) (8,780) – (26,001) Income from real estate 73,371 26,982 661 101,014 Interest expense & amortization of debt costs – – (30,207) (30,207) General and administrative – – (9,585) (9,585) Subtotal 73,371 26,982 (39,131) 61,222 Depreciation and amortization (16,283) (7,914) – (24,197) Minority interests – – (7,798) (7,798) Net income $ 57,088 $ 19,068 $ (46,929) $ 29,227 Capital investment $ 70,652 $ 3,153 $ – $ 73,805 Total assets $ 453,817 $ 131,402 $ 46,250 $ 631,469 2004 Real estate rental operations: Revenue $ 77,906 $ 34,679 $ 257 $ 112,842 Expenses (14,226) (8,121) – (22,347) Income from real estate 63,680 26,558 257 90,495 Interest expense & amortization of debt costs – – (27,022) (27,022) General and administrative – – (8,442) (8,442) Subtotal 63,680 26,558 (35,207) 55,031 Depreciation and amortization (13,758) (7,566) – (21,324) Gain on property sale 572 – – 572 Minority interests – – (8,105) (8,105) Net income $ 50,494 $ 18,992 $ (43,312) $ 26,174 Capital investment $ 109,874 $ 4,426 $ – $ 114,300 Total assets $ 394,674 $ 138,273 $ 50,449 $ 583,396 2003 Real estate rental operations: Revenue $ 66,070 $ 31,722 $ 92 $ 97,884 Expenses (12,274) (7,840) – (20,114) Income from real estate 53,796 23,882 92 77,770 Interest expense & amortization of debt costs – – (26,573) (26,573) General and administrative – – (6,213) (6,213) Subtotal 53,796 23,882 (32,694) 44,984 Depreciation and amortization (10,429) (7,409) – (17,838) Gain on property sale – 182 – 182 Minority interests – – (8,086) (8,086) Net income $ 43,367 $ 16,655 $ (40,780) $ 19,242 Capital investment $ 43,279 $ 6,122 $ – $ 49,401 Total assets $ 271,565 $ 138,862 $ 61,189 $ 471,616 N39 Notes to Consolidated Financial Statements
17. SUBSEQUENT EVENTS On January 10, 2006, the Company closed on a new fixed-rate mortgage financing in the amount of $10,500,000, secured by Jamestown Place, acquired in November 2005. The loan matures February 2021, requires equal monthly principal and interest payments of $66,000, based upon a 5.81% interest rate and 25-year principal amortization, and requires a final payment of $6,102,000 at maturity. On January 12, 2006, the Company agreed to final terms of a contract to purchase a 10.4 acre site in Frederick, Maryland, from a subsidiary of Chevy Chase Bank, a related party, for $5,000,000. The Company plans to develop this property into a retail center. The purchase price of the property was determined by the average of two independent third party appraisals which were contracted, one on behalf of the Company and one on behalf of Chevy Chase Bank. On January 27, 2006, the Company acquired the 198,000 square foot Smallwood Village Center, located on 25 acres within the St. Charles planned community of Waldorf, Maryland, a suburb of metropolitan Washington, DC, through a wholly-owned subsidiary of its operating partnership. The purchase price was $17,500,000 and was paid with cash and by the assumption of a mortgage loan. The outstanding balance on the loan was $11,333,000 at settlement. The loan matures January 2013, requires equal monthly principal and interest payments of $71,000, based upon a 6.12% interest rate and 30-year principal amortization, and requires a final payment of $10,071,000 at maturity. The property was approximately 89% leased at the date of acquisition. N40 Management’s Discussion & Analysis of Financial Condition & Results of Operations
Management’s Discussion and Analysis of Financial and re-leasing at market rates, as well as replacing Condition and Results of Operations (MD&A) begins with financially troubled tenants. When possible, management the Company’s primary business strategy to give the reader also will seek to include scheduled increases in base rent, an overview of the goals of the Company’s business. This is as well as percentage rental provisions, in its leases. followed by a discussion of the critical accounting policies The Company's redevelopment and renovation objective is that the Company believes are important to understanding to selectively and opportunistically redevelop and renovate the assumptions and judgments incorporated in the its properties, by replacing leases with below market rents Company’s reported financial results. The next section, with strong, traffic-generating anchor stores such as beginning on page 42, discusses the Company’s results of supermarkets and drug stores, as well as other desirable operations for the past two years. Beginning on page 46, local, regional and national tenants. The Company's strategy the Company provides an analysis of its liquidity and capital remains focused on continuing the operating performance resources, including discussions of its cash flows, debt and internal growth of its existing Shopping Centers, while arrangements, sources of capital and financial commitments. enhancing this growth with selective retail redevelopments Finally, on page 51, the Company discusses funds from and renovations. operations, or FFO, which is a relative non-GAAP financial measure of performance of an equity REIT used by the REIT Management believes that attractive acquisition and industry. development opportunities for investment in existing and new shopping center properties will continue to be available The MD&A should be read in conjunction with the other from time to time. Management believes that the Company’s sections of this Annual Report, including the consolidated capital structure will enable it to take advantage of these financial statements and notes thereto. Historical results opportunities as they arise. In addition, management set forth in Summary Financial Information, the Financial believes its shopping center expertise should permit it to Statements and this section should not be taken as optimize the performance of shopping centers once they indicative of the Company’s future operations. have been acquired. OVERVIEW Management also believes that opportunities may arise for investment in new office properties. It is management’s view The Company's principal business activity is the ownership, that several of the office sub-markets in which the Company management and development of income-producing operates have attractive supply/demand characteristics. The properties. The Company's long-term objectives are to Company will continue to evaluate new office development increase cash flow from operations and to maximize capital and redevelopment as an integral part of its overall business appreciation of its real estate. plan. The Company's primary operating strategy is to focus on its Although it is management's present intention to concentrate community and neighborhood shopping center business and future acquisition and development activities on community to operate its properties to achieve both cash flow growth and neighborhood shopping centers and office properties in and capital appreciation. Management believes there is the Washington, DC/Baltimore metropolitan area and the potential for growth in cash flow as existing leases for space southeastern region of the United States, the Company may, in the Shopping Centers expire and are renewed, or newly in the future, also acquire other types of real estate in other available or vacant space is leased. The Company intends areas of the country as opportunities present themselves. to renegotiate leases where possible and seek new tenants While the Company may diversify in terms of property for available space in order to maximize this potential for locations, size and market, the Company does not set any increased cash flow. As leases expire, management expects limit on the amount or percentage of Company assets that to revise rental rates, lease terms and conditions, relocate may be invested in any one property or any one geographic existing tenants, reconfigure tenant spaces and introduce area. In addition to investing in properties in the new tenants with the goal of increasing cash flow. In those Washington, DC/Baltimore metropolitan area, during 2004 circumstances in which leases are not otherwise expiring, and 2005, the Company also acquired four grocery-anchored management selectively attempts to increase cash flow neighborhood shopping centers in Florida, totaling 491,000 through a variety of means, or in connection with renovations square feet and another grocery-anchored neighborhood or relocations, recapturing leases with below market rents shopping center in Georgia totaling 79,000 square feet. N41 Management’s Discussion & Analysis of Financial Condition & Results of Operations
CRITICAL ACCOUNTING POLICIES required to adjust the carrying amount to its estimated fair market value. The Company’s accounting policies are in conformity with accounting principles generally accepted in the United When incurred, the Company capitalizes the cost of States (“GAAP”). The preparation of financial statements in improvements that extend the useful life of property and conformity with GAAP requires management to use judgment equipment and all repair and maintenance expenditures are in the application of accounting policies, including making expensed. In addition, we capitalize leasehold improvements estimates and assumptions. These judgments affect the when certain criteria are met, including when we supervise reported amounts of assets and liabilities and disclosure construction and will own the improvement. of contingent assets and liabilities at the dates of the Interest, real estate taxes and other carrying costs are Company’s financial statements and the reported amounts capitalized on projects under construction. Once of revenue and expenses during the reporting periods. If construction is substantially complete and the assets are judgment or interpretation of the facts and circumstances placed in service, rental income, direct operating expenses, relating to various transactions had been different, it is and depreciation associated with such properties are possible that different accounting policies would have been included in current operations. applied resulting in a different presentation of the financial statements. Below is a discussion of accounting policies In the initial rental operations of development projects, a which the Company considers critical in that they may project is considered substantially complete and available require judgment in their application or require estimates for occupancy upon completion of tenant improvements, about matters which are inherently uncertain. Additional but no later than one year from the cessation of major discussion of accounting policies which the Company construction activity. Substantially completed portions of a considers significant, including further discussion of the project are accounted for as separate projects. Depreciation critical accounting policies described below, can be found is calculated using the straight-line method and estimated in the Notes to the Consolidated Financial Statements. useful lives of 35 to 50 years for base buildings and up to 20 years for certain other improvements. Leasehold Real Estate Investments improvements are amortized over the lives of the related Real estate investment properties are stated at historic cost leases using the straight-line method. basis less depreciation. Management believes that these assets have generally appreciated in value and, accordingly, Lease Acquisition Costs the aggregate current value exceeds their aggregate net Certain initial direct costs incurred by the Company in book value and also exceeds the value of the Company’s negotiating and consummating successful leases are liabilities as reported in these financial statements. Because capitalized and amortized over the initial base term of the these financial statements are prepared in conformity with leases. Capitalized leasing costs consist of commissions GAAP, they do not report the current value of the Company’s paid to third party leasing agents as well as internal direct real estate assets. The purchase price of real estate assets costs such as employee compensation and payroll related acquired is allocated between land, building and in-place fringe benefits directly related to time spent performing acquired leases based on the relative fair values of the leasing related activities. Such activities include evaluating components at the date of acquisition. Buildings are prospective tenants’ financial condition, evaluating and depreciated on a straight-line basis over their estimated recording guarantees, collateral and other security useful lives of 35 to 50 years. Intangibles associated with arrangements, negotiating lease terms, preparing lease acquired in-place leases are amortized over the remaining documents and closing transactions. base lease terms. If there is an event or change in circumstance that indicates Revenue Recognition an impairment in the value of a real estate investment Rental and interest income is accrued as earned except property, the Company assesses an impairment in value by when doubt exists as to collectibility, in which case the making a comparison of the current and projected operating accrual is discontinued. Recognition of rental income cash flows of the property over its remaining useful life, on commences when control of the space has been given to the an undiscounted basis, to the carrying amount of that tenant. When rental payments due under leases vary from a property. If such carrying amount is greater than the straight-line basis because of free rent periods or scheduled estimated projected cash flows, the Company would rent increases, income is recognized on a straight-line basis recognize an impairment loss equivalent to an amount throughout the initial term of the lease. Expense recoveries N42 Management’s Discussion & Analysis of Financial Condition & Results of Operations represent a portion of property operating expenses billed to tenants over the remaining term of their respective leases. tenants, including common area maintenance, real estate Reserves are established with a charge to income for taxes and other recoverable costs. Expense recoveries are tenants whose rent payment history or financial condition recognized in the period when the expenses are incurred. casts doubt upon the tenant's ability to perform under its Rental income based on a tenant's revenues, known as lease obligations. percentage rent, is accrued when a tenant reports sales that exceed a specified breakpoint. Legal Contingencies The Company is subject to various legal proceedings and Allowance for Doubtful Accounts - claims that arise in the ordinary course of business. These Current and Deferred Receivables matters are generally covered by insurance. While the Accounts receivable primarily represent amounts accrued resolution of these matters cannot be predicted with and unpaid from tenants in accordance with the terms of certainty, the Company believes the final outcome of such the respective leases, subject to the Company’s revenue matters will not have a material adverse effect on the recognition policy. Receivables are reviewed monthly and financial position or the results of operations. Once it has reserves are established with a charge to current period been determined that a loss is probable to occur, the operations when, in the opinion of management, collection of estimated amount of the loss is recorded in the financial the receivable is doubtful. In addition to rents due currently, statements. Both the amount of the loss and the point at accounts receivable include amounts representing minimum which its occurrence is considered probable can be difficult rental income accrued on a straight-line basis to be paid by to determine.
RESULTS OF OPERATIONS
Revenue For the year ended December 31, Percentage Change (Dollars in thousands) 2005 2004 2003 2005 to 2004 2004 to 2003 Base rent $ 99,448 $ 91,125 $ 78,167 9.1% 16.6% Expense recoveries 20,027 16,712 14,438 19.8% 15.8% Percentage rent 2,057 1,635 1,695 25.8% (3.5%) Other 5,483 3,370 3,584 62.7% (6.0%) Total $ 127,015 $ 112,842 $ 97,884 12.6% 15.3%
Total revenue increased 12.6% for the 2005 year compared to contributed $8,414,000 or 59.4% of the increase in revenues. 2004 primarily due to (1) the contribution of operating The net payment related to the resolution of the Lexington revenue from three development properties (Shops at Mall land use dispute contributed $1,801,000 or 12.7% of the Monocacy, Kentlands Place and Broadlands Village II) and increase in revenues. 601 Pennsylvania Avenue also three acquisition properties (Palm Springs, Jamestown Place contributed $768,000 or 5.4% of the increase due to both a and Seabreeze Plaza) placed in service during 2005 and four collection of a lease termination fee and increased rental operating properties acquired during the first half of 2004, income because all of its rentable area was producing rent (Boca Valley Plaza, Countryside, Cruse MarketPlace and during 2005 while a portion of the area was being prepared Briggs Chaney MarketPlace) together defined as the for occupancy during the 2004. Also contributing to the 2005 “2005/2004 Development and Acquisition Properties”, whose revenue increase were rents earned at the Company’s operating results are included in 2005’s operating income but Thruway (resulting from a 15,725 square foot expansion not fully in the previous year’s results and (2) the payment completed in April 2004), The Glen (impacted by a 22,000 related to resolution of a land use dispute with a property square foot expansion completed November 2005) and owner adjacent to the Company’s Lexington Mall. The Southdale shopping centers, which provided increased 2005/2004 Development and Acquisition Properties revenues of $533,000 or 3.8%, $392,000 or 2.8% and $376,000 or 2.7%, respectively. N43 Management’s Discussion & Analysis of Financial Condition & Results of Operations
Total revenue increased 15.3% for the 2004 year compared The 2004/2003 Development and Acquisition Properties to 2003 primarily due to the contribution of operating revenue provided the majority (81.3% or approximately $1,849,000) from three development properties and five acquisition of the 2004 versus 2003 increase of $2,274,000 in expense properties placed in service during 2004 or 2003. The recovery income. The office properties 601 Pennsylvania developments Broadlands Village II and Shops at Monocacy Avenue and Van Ness Square also made significant were placed in service in 2004 and Broadlands Village in contributions toward the 2004 increase (together, 20.1% 2003. The acquisition properties Boca Valley Plaza, or approximately $457,000). Countryside, Cruse MarketPlace and Briggs Chaney Plaza were acquired in 2004 and Olde Forte Village was acquired Percentage Rent in 2003 (the “2004/2003 Development and Acquisition Percentage rent is rental revenue calculated on the portion Properties”). The 2004/2003 Development and Acquisition of a tenant’s sales revenue that exceeds a specified Properties contributed $10,888,000 or 72.8% of the increase breakpoint. The majority of the $422,000 2005 versus 2004 in revenues. The Company’s 601 Pennsylvania Avenue office increase in percentage rents resulted from improved sales property was fully leased during 2004 and contributed reported by a restaurant tenant at 601 Pennsylvania Avenue $2,267,000 or 15.2% of the year’s revenue improvement. (53.3% or approximately $225,000). Additionally, 2005 A discussion of the components of revenue follows. percentage rent was positively impacted by two tenants at Southdale, one paying percentage rent for the first time and Base Rent the other reporting improved sales (together, 18.7% or The $8,323,000 increase in base rent for 2005 versus 2004 approximately $79,000). Smaller percentage rent increases was primarily attributable (76.4% or approximately $6,362,000) were recognized at several of the Company’s properties due to leases in effect at the 2005/2004 Development and to increased sales reported by selected tenants at those Acquisition Properties. Thruway also contributed to the properties. increase in base rent (5.3% or approximately $437,000). Percentage rent decreased $60,000 for 2004 versus 2003 due Contractual rent increases at other properties substantially to a change in major tenant’s sales reporting procedures. accounted for the balance of the increase. In years prior to 2004, the tenant voluntarily provided interim The $12,958,000 increase in base rent for 2004 versus 2003 sales reports upon which the Company had based its was primarily attributable (69.1% or approximately $8,958,000) calculations. The tenant has indicated that going forward, it to leases in effect at the 2004/2003 Development and will only provide required annual sales reports per the terms Acquisition Properties. The lease-up of space at 601 of its lease agreement. Accounting rules prohibit the accrual Pennsylvania Avenue (14.6% or approximately $1,886,000) and of percentage rent until the tenant actually reports sales. contractual rent increases at other Properties substantially Therefore, the tenant’s sales reporting change impacts only accounted for the balance of the increase. the timing of when the Company recognizes percentage rent. The Company recognized percentage rent for this tenant Expense Recoveries during the second quarter of year 2005. Expense recoveries represent a portion of property operating expenses billable to tenants, including common area Other Revenue maintenance, real estate taxes and other recoverable costs. Other revenue consists primarily of parking revenue at three The majority of the $3,315,000 2005 versus 2004 increase in of the Office Properties, kiosk leasing, temporary leases and expense recovery income was contributed by the 2005/2004 payments associated with early termination of leases and Development and Acquisition Properties (58.8% or interest income from the investment of cash balances. Other approximately $1,948,000). Increased operating expenses revenue increased $2,113,000 during 2005 versus 2004 as a recovered from tenants in the office portfolio (19.3% or result of $1,801,000 (85.2 % of increase) related to resolution approximately $640,000) contributed toward the 2005 of a land use dispute with a property owner adjacent to the increase. Increased real estate taxes, insurance, repairs Company’s Lexington Mall and increased interest income and utilities expenses at several of the Company’s other from short-term investments (19.1% or $404,000). Also properties were incurred and recovered from tenants. contributing to the other revenue increase was the collection of a lease termination fee and settlement of a rent dispute with two former tenants at 601 Pennsylvania Avenue (12.4% N44 Management’s Discussion & Analysis of Financial Condition & Results of Operations or $262,000). The other revenue increases were offset in part The $214,000 decrease in other income for 2004 versus by reduced parking revenue in the office portfolio (7.0% or 2003 resulted primarily from a $619,000 decrease in lease $147,000), primarily at 601 Pennsylvania Avenue where termination fees from $1,286,000 in 2003 to $667,000 in 2004, parking spaces were temporarily placed out of service while which was partially offset by an increase in parking income the parking deck was being refurbished, and lower overall at the Office Properties of $178,000 and an increase in cash lease termination fees received in 2005 compared to 2004. investment income of $166,000 in 2004.
Operating Expenses For the year ended December 31, Percentage Change (Dollars in thousands) 2005 2004 2003 2005 to 2004 2004 to 2003 Property operating expenses $ 14,724 $ 12,070 $ 11,363 22.0% 6.2% Provision for credit losses 237 488 171 (51.4%) 185.4% Real estate taxes 11,040 9,789 8,580 12.8% 14.1% Interest expense and amortization of deferred debt 30,207 27,022 26,573 11.8% 1.7% Depreciation and amortization 24,197 21,324 17,838 13.5% 19.5% General and administrative 9,585 8,442 6,213 13.5% 35.9% Total $ 89,990 $ 79,135 $ 70,738 13.7% 11.9%
Property Operating Expenses credit losses decreased $251,000 for 2005 versus 2004 due Property operating expenses consist primarily of repairs and primarily to the absence of significant credit losses maintenance, utilities, payroll, insurance and other property experienced during 2004 at Great Eastern Plaza ($155,000) related expenses. The $2,654,000 increase in 2005 versus and Leesburg Pike ($113,000). 2004 property operating expenses was caused primarily by The provision for credit losses increased $317,000 for 2004 the operation of the 2005/2004 Development and Acquisition versus 2003 primarily due to 2003’s absence of any significant Properties (48.4% or approximately $1,286,000) and to a lesser tenant bankruptcy or collection difficulties. The 2004 extent increased operating expenses, primarily increased provision for credit loss includes a $155,000 provision for an repairs and maintenance and utilities expenses, at the office anchor tenant at Great Eastern Plaza, a $113,000 provision properties (16.9% or approximately $448,000) and increased for a former tenant at Leesburg Pike Plaza, and a $55,000 repair and maintenance expenses in shopping centers provision for a tenant at Seven Corners Center. owned more than one year (22.2% or approximately $590,000). Property operating expenses increased $707,000 for 2004 Real Estate Taxes versus 2003. The Development and Acquisition Properties The $1,251,000 increase in real estate taxes for 2005 versus accounted for a $1,024,000 increase in property operating 2004 was primarily attributable to the commencement of expenses during 2004 which was offset by an approximately operations at the 2005/2004 Development and Acquisition $591,000 decrease in snow removal expenses at the Properties (63.1% or approximately $790,000). In addition, the remainder of the property portfolio due to 2003’s majority of the Company’s properties received increases in unseasonably severe winter weather primarily in the assessed values during 2005, especially newly acquired, Mid-Atlantic region. developed or redeveloped properties and those properties located in the Metropolitan Washington, DC area. Provision for Credit Losses The $1,209,000 increase in real estate taxes for 2004 versus The provision for credit losses represents the Company’s 2003 was primarily attributable to the commencement of estimation that amounts previously included in income and operations at the 2004/2003 Development and Acquisition owed by tenants may not be collectible. The provision for Properties (79.2% or approximately $958,000). N45 Management’s Discussion & Analysis of Financial Condition & Results of Operations
Interest and Amortization of Deferred Debt Depreciation and Amortization Interest expense increased $2,953,000 and Deferred debt The $2,873,000 increase in depreciation and amortization cost amortization increased $232,000 in 2005 versus 2004. expense resulted primarily from the acceleration of Interest expense increased due to new borrowings, as the depreciation expense during 2005 related to the shortened Company placed permanent 15-year fixed rate mortgages on useful life of vacant buildings at Lexington Mall, exclusive of selected 2005/2004 Development and Acquisition Properties. the Dillard’s space, resulting from the resolution of a land use The increase in average outstanding borrowings of dispute with an adjacent property owner and the resulting approximately $56,000,000 resulted from financing selected determination by management to take the building out of 2005/2004 Development and Acquisition Properties service and redevelop the shopping center (52.7% or (approximately $4,051,000 increase in interest expense). $1,515,000). The balance of the increase in depreciation and Offsetting the increase in interest expense was an amortization expense resulted primarily from the 2005/2004 approximately 23 basis point decrease in the average interest Development and Acquisition Properties placed in service rate for the loan portfolio as the Company financed the new during 2005 and 2004. The remaining approximately borrowings at interest rates lower than the average existing $1,500,000 of net book value was attributable to the Dillard’s mortgage debt (approximately $1,067,000 decrease in interest building, which was taken out of service effective October expense). The Company also paid a $92,000 prepayment 31, 2005 upon termination of Dillard’s lease. The Company is premium on the refinancing of a mortgage loan during 2005 pursuing either leasing opportunities for the existing space or in order to obtain a new 15-year loan at a lower interest rate. potentially demolishing the building in conjunction with the Interest was capitalized as a cost of construction and overall redevelopment of the rest of the property which will development projects during the 2005 and 2004 years in the determine the remaining depreciable life of the building. amount of $3,258,000 and $3,227,000, respectively ($31,000 The ultimate plan for this site and the treatment of the decrease in interest expense). Deferred debt cost remaining capitalized costs is expected to be made by amortization expense was $1,161,000 and $929,000, for the management in 2006. 2005 and 2004 periods, respectively. The increased expense The increase in depreciation and amortization expense ($232,000) resulted from amortization of financing costs of from 2003 to 2004 of $3,486,000 resulted primarily from the new mortgage loans and the early write-off of unamortized 2004/2003 Development and Acquisition Properties placed costs incident to the refinancing of the Company’s revolving in service during 2004 and 2003. credit facility during the 2005. Of the $449,000 increase from 2004 versus 2003, $322,000 General and Administrative resulted from increased interest expense and $127,000 General and administrative expenses consists of payroll, resulted from increased amortization of deferred debt administrative and other overhead expenses. The $1,143,000 expense. Interest expense increased in 2004 versus 2003 increase in general and administrative expenses for 2005 due to an increase in average outstanding borrowings of versus 2004 was attributable primarily to increased payroll approximately $22,645,000 ($1,608,000 interest expense and related expenses in part for additional construction and increase) and an increase in the weighted average interest leasing administration (38.3% or $438,000), the write-off of rate of 12 basis points ($501,000 interest expense increase), abandoned acquisition (7.3% or $84,000) and redevelopment reflecting the Company’s repayment of all of its short-term costs associated with pre-settlement land use requirements line of credit borrowings with proceeds from new 15-year at Lexington Mall (21.5% or $246,000) and increased office fixed rate mortgages. As a result of the 2004 financing rent for the Company’s corporate offices in Bethesda, activity, the allocation of the Company’s average floating Maryland (19.9% or $227,000). rate notes payable balances as a percentage of total indebtedness decreased from 12% in 2003 to 1% in 2004. The $2,229,000 increase in general and administrative The increase in interest expense resulting from the new expense for 2004 versus 2003 was attributable to increased financings was more than offset by an increase in interest payroll, retirement and employment expenses (46.7% or capitalized on costs of construction and development work. $1,040,000) primarily resulting from staffing for the Company’s During 2004 and 2003, $3,227,000 and $1,382,000, was acquisitions department and a non-recurring retirement capitalized, respectively ($1,845,000 interest expense payment to a former executive officer. In addition, decrease). accounting fees and other administrative expenses, incurred to comply with new Sarbanes-Oxley documentation and compliance requirements, increased 27.5% or $614,000, and the expensing of officer and director stock options increased 6.7% or $150,000. N46 Management’s Discussion & Analysis of Financial Condition & Results of Operations
Gain on Sale of Property Operating Activities The Company recognized a gain on the sale of real estate Cash provided by operating activities increased $7,715,000 to of $572,000 in 2004 and $182,000 in 2003. There were no $58,401,000 for the year ended December 31, 2005 compared property dispositions in 2005. The 2004 gain resulted from the to $50,686,000 for the year ended December 31, 2004 primarily State of Maryland’s condemnation and taking of a small strip reflecting increased operating income of the 2005/2004 of unimproved land for a road widening project at White Oak Development and Acquisition Properties. Cash provided by shopping center. The 2003 gain resulted from the State of operating activities represents, in each year, cash received Maryland’s condemnation and purchase of a piece of vacant primarily from rental income, plus other income, less property land at Avenel Business Park for improvement of an operating expenses, normal recurring general and interchange on I-270, adjacent to the property. administrative expenses and interest payments on debt outstanding. IMPACT OF INFLATION Inflation has remained relatively low and has had a minimal Investing Activities impact on the operating performance of the Company's Cash used in investing activities decreased $39,662,000 to portfolio; however, substantially all of the Company's leases $73,805,000 for the year ended December 31, 2005 compared contain provisions designed to mitigate the adverse impact to $113,467,000 for the year ended December 31, 2004 and of inflation on the Company's results of operations. These primarily reflects the acquisition of properties (Palm Springs provisions include upward periodic adjustments in base rent Center, Jamestown Place and Seabreeze Plaza and land due from tenants, usually based on a stipulated increase and parcels at Lansdowne Town Center and New Market in 2005 to a lesser extent on a factor of the change in the consumer and Boca Valley Plaza, Briggs Chaney Plaza, Countryside, price index, commonly referred to as the CPI. Cruse MarketPlace and the Kentlands Place and Ashland Square land parcels in 2004), the construction of new Substantially all of the Company's properties are leased to shopping center properties (The Glen expansion in 2005 tenants under long-term leases, which provide for and Broadlands Village II, Shops at Monocacy, Kentlands reimbursement of operating expenses by tenants. These Place and Olde Forte Village redevelopment in 2004), tenant leases tend to reduce the Company's exposure to rising improvements and construction in progress during those property expenses due to inflation. Inflation and increased years. costs may have an adverse impact on the Company's tenants if increases in their operating expenses exceed increases in Financing Activities their revenue. Cash used by financing activities for the year ended December 31, 2005 was $10,150,000 and cash provided by LIQUIDITY AND CAPITAL RESOURCES financing activities for the year ended December 31, 2004 Cash and cash equivalents were $8,007,000 and $33,561,000 was $51,098,000. Cash used by financing activities for the at December 31, 2005 and 2004, respectively. The changes in year ended December 31, 2005 primarily reflects: cash and cash equivalents during the years ended December • the repayment of borrowings on mortgage notes payable 31, 2005 and 2004 were attributable to operating, investing totaling $20,794,000; and financing activities, as described below. • distributions made to common stockholders and holders of convertible limited partnership units in the Operating Partnership during the year totaling $34,887,000; Year Ended December 31, (Dollars in thousands) 2005 2004 • distributions made to preferred stockholders during the year totaling $8,000,000; and, Cash provided by operating activities $ 58,401 $ 50,686 • payments of $2,025,000 for financing costs of the revolving Cash used in investing activities (73,805) (113,467) credit facility and two mortgage loans during 2005; Cash (used) provided by financing activities (10,150) 51,098 Decrease in cash $ (25,554) $ (11,683) N47 Management’s Discussion & Analysis of Financial Condition & Results of Operations which was partially offset by: requirements (other than amounts required for additional property acquisitions and developments) through cash • $25,500,000 of proceeds received from mortgage notes provided from operations, available cash and its existing payable incurred during the year; line of credit. • amounts borrowed from the revolving credit facility totaling $10,500,000; and, Long-term liquidity requirements consisted primarily of obligations under our long-term debt and dividends paid to • $19,556,000 of proceeds received from the issuance of our preferred shareholders. We anticipate that long-term common stock under the dividend reinvestment program liquidity requirements will also include amounts required for and from the exercise of stock options, and from the property acquisitions and developments. Management issuance of convertible limited partnership interests in anticipates that during the coming year the Company may: the Operating Partnership; • redevelop certain of the Current Portfolio Properties, Cash provided by financing activities for the year ended December 31, 2004 primarily reflects: • develop additional freestanding outparcels or expansions • $94,800,000 of proceeds received from mortgage notes within certain of the Shopping Centers, payable incurred during the year; and, • acquire existing neighborhood and community shopping • $14,851,000 of proceeds received from the issuance of centers and/or office properties, and, common stock under the dividend reinvestment program • develop new shopping center or office sites. and from the exercise of stock options, and from the issuance of convertible limited partnership interests in Acquisition and development of properties are undertaken the Operating Partnership; only after careful analysis and review, and management’s determination that such properties are expected to provide which was partially offset by: long-term earnings and cash flow growth. During the coming • the repayment of borrowings on mortgage notes payable year, developments, expansions or acquisitions are expected totaling $16,427,000; to be funded with available cash, bank borrowings from the • distributions made to common stockholders and holders Company’s credit line, construction and permanent financing, of convertible limited partnership units in the Operating proceeds from the operation of the Company’s dividend Partnership during the year totaling $33,166,000; reinvestment plan or other external debt or equity capital • distributions made to preferred stockholders during the resources available to the Company and proceeds from the year totaling $7,244,000; and, sale of properties. Borrowings may be at the Saul Centers, Operating Partnership or Subsidiary Partnership level, and • payments of $1,716,000 for financing costs of six mortgage securities offerings may include (subject to certain loans during 2004. limitations) the issuance of additional limited partnership The Company also temporarily borrowed and subsequently interests in the Operating Partnership which can be repaid $33,000,000 on its revolving credit facility during 2004. converted into shares of Saul Centers common stock. The availability and terms of any such financing will depend Liquidity Requirements upon market and other conditions. Short-term liquidity requirements consist primarily of normal recurring operating expenses and capital expenditures, debt service requirements (including debt service relating to additional and replacement debt), distributions to common and preferred stockholders, distributions to unit holders and amounts required for expansion and renovation of the Current Portfolio Properties and selective acquisition and development of additional properties. In order to qualify as a REIT for federal income tax purposes, the Company must distribute to its stockholders at least 90% of its “real estate investment trust taxable income,” as defined in the Code. The Company expects to meet these short-term liquidity N48 Management’s Discussion & Analysis of Financial Condition & Results of Operations
Contractual Payment Obligations As of December 31, 2005, the Company had unfunded contractual payment obligations of approximately $23.2 million, excluding operating obligations, due within the next 12 months. The table below specifies the total contractual payment obligations as of December 31, 2005.
Payments Due By Period (Dollars in thousands) Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years Notes Payable $ 482,431 $ 12,991 $ 39,458 $ 33,518 $ 396,464 Operating Leases (1) 11,593 164 328 334 10,767 Corporate Headquarters Lease (1) 4,385 658 1,376 1,460 891 Development Obligations (2) 9,345 9,345 – – – Total Contractual Cash Obligations $ 507,754 $ 23,158 $ 41,162 $ 35,312 $ 408,122
(1) See Note 7 to Consolidated Financial Statements. Corporate Headquarters Lease amounts represent an allocation to the Company based upon employees’ time dedicated to the Company’s business as specified in the Shared Services Agreement. Future amounts are subject to change as the number of employees, employed by each of the parties to the lease, fluctuate. (2) In addition to development obligations presented as of December 31, 2005, the Company executed a contract with a general contractor, dated January 4, 2006, in the amount of $18,480,000, to construct Lansdowne Town Center. Substantially all of the amounts are expected to be paid during 2006.
Management believes that the Company's capital resources, is not convertible into any other securities of the Company. which at December 31, 2005 included cash balances of $8.0 Investors in the depositary shares generally have no voting million and borrowing availability of $139.5 million on its rights, but will have limited voting rights if the Company fails revolving line of credit ($72.5 million for general corporate to pay dividends for six or more quarters (whether or not use and $67 million for qualified future acquisitions), will be declared or consecutive) and in certain other events. sufficient to meet its liquidity needs for the foreseeable future. Dividend Reinvestments In December 1995, the Company established a Dividend Preferred Stock Issue Reinvestment Plan (the “Plan”) to allow its common On July 16, 2003, the Company filed a shelf registration stockholders and holders of limited partnership interests an statement with the SEC relating to the future offering of up opportunity to buy additional shares of common stock by to an aggregate of $100 million of preferred stock and reinvesting all or a portion of their dividends or distributions. depositary shares. On November 5, 2003, the Company sold The Plan provides for investing in newly issued shares of 3,500,000 depositary shares, each representing 1/100th of common stock at a 3% discount from market price without a share of 8% Series A Cumulative Redeemable Preferred payment of any brokerage commissions, service charges or Stock. The underwriters exercised an over-allotment option, other expenses. All expenses of the Plan are paid by the purchasing an additional 500,000 depositary shares on Company. The Company issued 455,494 and 497,282 shares November 26, 2003. under the Plan at a weighted average discounted price of $33.66 and $27.70 per share during the years ended The depositary shares may be redeemed, in whole or in part, December 31, 2005 and 2004, respectively. at the $25.00 liquidation preference at the Company’s option on or after November 5, 2008. The depositary shares pay an Additionally, the Operating Partnership issued 110,910 annual dividend of $2.00 per depositary share, equivalent to and 11,557 limited partnership units under a dividend 8% of the $25.00 liquidation preference. The first dividend, reinvestment plan mirroring the Plan at a weighted average paid on January 15, 2004 was for less than a full quarter and discounted price of $35.15 and $27.66 per unit during the covered the period from November 5 through December 31, years ended December 31, 2005 and 2004, respectively. 2003. The Series A preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and N49 Management’s Discussion & Analysis of Financial Condition & Results of Operations
CAPITAL STRATEGY AND reevaluate the Company's debt capitalization policy in light of FINANCING ACTIVITY current economic conditions, relative costs of capital, market values of the Company property portfolio, opportunities for As a general policy, the Company intends to maintain a ratio acquisition, development or expansion, and such other of its total debt to total asset value of 50% or less and to factors as the Board of Directors then deems relevant. actively manage the Company’s leverage and debt expense The Board of Directors may modify the Company's debt on an ongoing basis in order to maintain prudent coverage of capitalization policy based on such a reevaluation without fixed charges. Asset value is the aggregate fair market value shareholder approval and consequently, may increase or of the Current Portfolio Properties and any subsequently decrease the Company's debt to total asset ratio above or acquired properties as reasonably determined by below 50% or may waive the policy for certain periods of management by reference to the properties’ aggregate cash time. The Company selectively continues to refinance or flow. Given the Company's current debt level, it is renegotiate the terms of its outstanding debt in order to management's belief that the ratio of the Company's debt to achieve longer maturities, and obtain generally more total asset value was below 50% as of December 31, 2005. favorable loan terms, whenever management determines The organizational documents of the Company do not limit the financing environment is favorable. the absolute amount or percentage of indebtedness that it The following is a summary of notes payable as of December may incur. The Board of Directors may, from time to time, 31, 2005 and 2004:
Notes Payable December 31, Interest Scheduled (Dollars in thousands) 2005 2004 Rate * Maturity * Fixed rate mortgages: $ 91,203 (a) $ 94,794 8.00% Dec-2011 126,637 (b) 129,883 7.67% Oct-2012 32,185 (c) 33,138 7.88% Jan-2013 8,520 (d) 8,699 5.77% Jul-2013 13,554 (e) – 5.28% May-2014 12,712 (f) 13,057 8.33% Jun-2015 40,627 (g) 41,324 6.01% Feb-2018 46,479 (h) 47,375 5.88% Jan-2019 15,040 (i) 15,335 5.76% May-2019 20,774 (j) 21,185 5.62% Jul-2019 20,514 (k) 20,906 5.79% Sep-2019 18,407 (l) 18,750 5.22% Jan-2020 12,901 (m) 9,200 5.60% May-2020 12,378 (n) – 5.30% Jun-2020 Total fixed rate 471,931 453,646 6.90% 9.3 Years Variable rate loan: Revolving credit facility 10,500 (o) – LIBOR + 1.5 % Jan-2008 Total variable rate 10,500 – 5.82% 2.1 Years Total notes payable $ 482,431 $ 453,646 6.87% 9.2 Years
* Interest rate and scheduled maturity data presented as of December 31, 2005. Totals computed using weighted averages. N50 Management’s Discussion & Analysis of Financial Condition & Results of Operations
(a) The loan is collateralized by Avenel Business Park, Van Ness Square, Ashburn Village, Leesburg Pike, Lumberton Plaza and Village Center. The loan has been increased on four occasions since its inception in 1997. The 8.00% blended interest rate is the weighted average of the initial loan rate and additional borrowing rates. The loan requires equal monthly principal and interest payments of $920,000 based upon a weighted average 23-year amortization schedule and a final payment of $63,153,000 at loan maturity. Principal of $3,591,000 was amortized during 2005. (b) The loan is collateralized by nine shopping centers (Seven Corners, Thruway, White Oak, Hampshire Langley, Great Eastern, Southside Plaza, Belvedere, Giant and Ravenwood) and requires equal monthly principal and interest payments of $1,103,000 based upon a 25-year amortization schedule and a final payment of $97,403,000 at loan maturity. Principal of $3,246,000 was amortized during 2005. (c) The loan is collateralized by 601 Pennsylvania Avenue and requires equal monthly principal and interest payments of $294,000 based upon a 25-year amortization schedule and a final payment of $22,961,000 at loan maturity. Principal of $953,000 was amortized during 2005. (d) The loan is collateralized by Cruse MarketPlace and requires equal monthly principal and interest payments of $56,000 based upon an amortization schedule of approximately 24 years and a final payment of $6,830,000 at loan maturity. Principal of $179,000 was amortized during 2005. (e) The loan is collateralized by Seabreeze Plaza and requires equal monthly principal and interest payments of $84,000 based upon a 25-year amortization schedule and a final payment of $10,531,000 at loan maturity. Principal of $25,000 was amortized during 2005. (f) The loan is collateralized by Shops at Fairfax and Boulevard shopping centers and requires monthly principal and interest payments of $118,000 based upon a 22-year amortization schedule and a final payment of $7,630,000 at loan maturity. Principal of $345,000 was amortized during 2005. (g) The loan is collateralized by Washington Square and requires equal monthly principal and interest payments of $264,000 based upon a 27.5-year amortization schedule and a final payment of $28,012,000 at loan maturity. Principal of $697,000 was amortized during 2005. (h) The loan, consisting of two notes dated December 2003 and two notes dated February and December 2004, is currently collateralized by four shopping centers, Broadlands Village (Phases I & II), The Glen and Kentlands Square, and requires equal monthly principal and interest payments of $306,000 (beginning February 1, 2005; prior to that date, payments totaled $256,000 per month) based upon a 25-year amortization schedule and a final payment of $28,393,000 at loan maturity. Principal of $896,000 was amortized during 2005. (i) The loan is collateralized by Olde Forte Village and requires equal monthly principal and interest payments of $98,000 based upon a 25-year amortization schedule and a final payment of $8,985,000 at loan maturity. Principal of $295,000 was amortized during 2005. (j) The loan is collateralized by Countryside and requires equal monthly principal and interest payments of $133,000 based upon a 25- year amortization schedule and a final payment of $12,288,000 at loan maturity. Principal of $411,000 was amortized during 2005. (k) The loan is collateralized by Briggs Chaney MarketPlace and requires equal monthly principal and interest payments of $133,000 based upon a 25-year amortization schedule and a final payment of $12,192,000 at loan maturity. Principal of $392,000 was amortized during 2005. (l) The loan is collateralized by Shops at Monocacy and requires equal monthly principal and interest payments of $112,000 based upon a 25-year amortization schedule and a final payment of $10,568,000 at loan maturity. Principal of $343,000 was amortized during 2005. (m) The loan is collateralized by Boca Valley Plaza and requires equal monthly principal and interest payments of $75,000 based upon a 30-year amortization schedule and a final payment of $9,149,000 at loan maturity. Principal of $99,000 was amortized during 2005. The previous loan was repaid in 2005 with proceeds from this financing. (n) The loan is collateralized by Palm Springs Center and requires equal monthly principal and interest payments of $75,000 based upon a 25-year amortization schedule and a final payment of $7,075,000 at loan maturity. Principal of $122,000 was amortized during 2005. (o) The loan is an unsecured revolving credit facility totaling $150,000,000. Loan availability for working capital and general corporate uses is determined by operating income from the Company’s unencumbered properties, with a portion available only for funding qualified operating property acquisitions. Interest expense is calculated based upon the 1,2,3 or 6 month LIBOR rate plus a spread of 1.40% to 1.625% (determined by certain debt service coverage and leverage tests) or upon the bank’s reference rate at the Company’s option. The line may be extended one year with payment of a fee of 1/4% at the Company’s option. Monthly payments, if applicable, are interest only and will vary depending upon the amount outstanding and the applicable interest rate for any given month. N51 Management’s Discussion & Analysis of Financial Condition & Results of Operations
The December 31, 2005 and 2004 depreciation adjusted cost of Boca Valley Plaza. The new loan is a 15-year, $13,000,000 of properties collateralizing the mortgage notes payable fixed-rate mortgage loan collateralized by Boca Valley Plaza. totaled $467,015,000 and $420,320,000, respectively. Notes The loan requires monthly principal and interest payments payable at December 31, 2005 and 2004, totaling $169,322,000 based upon a fixed interest rate of 5.60% and a 30-year and $163,022,000, respectively, are guaranteed by members amortization schedule. A final payment of $9,149,000 will be of The Saul Organization. The Company’s credit facility due at loan maturity, May 2020. The second loan is a requires the Company and its subsidiaries to maintain certain permanent financing of Palm Springs Center, acquired in financial covenants. As of December 31, 2005, the material March 2005. The loan is a 15-year, $12,500,000 fixed-rate covenants required the Company, on a consolidated basis, to: mortgage loan collateralized by Palm Springs Center. The loan requires monthly principal and interest payments based • limit the amount of debt so as to maintain a gross asset upon a fixed interest rate of 5.30% and a 25-year amortization value in excess of liabilities of at least $400 million; schedule. A final payment of $7,075,000 will be due at loan • limit the amount of debt as a percentage of gross asset maturity, June 2020. On November 30, 2005 the Company value (leverage ratio) to less than 60%; assumed an existing $13,600,000 loan upon the acquisition of • limit the amount of debt so that interest coverage will Seabreeze Plaza. The loan requires fixed monthly principal exceed 2.1 to 1 on a trailing four quarter basis; and, and interest payments based upon a 5.28% interest rate and 25-year amortization. A final payment of $10,531,000 will be • limit the amount of debt so that interest, scheduled due at loan maturity, May 2014. principal amortization and preferred dividend coverage exceeds 1.55 to 1. In December 2005, the Company entered into a rate lock agreement and made application for a 15-year, $40,000,000 As of December 31, 2005, the Company was in compliance fixed-rate mortgage loan to be collateralized by Lansdowne with all such covenants. Town Center. The rate lock agreement set the interest rate During 2005, the Company refinanced its revolving credit at 5.62%, contingent upon meeting certain construction and facility, refinanced an existing mortgage loan, completed a leasing criteria prior to loan funding, projected to occur in new mortgage financing and assumed an existing mortgage February 2007. The Company paid a loan deposit fee of loan upon the acquisition of a shopping center. On January $850,000 which is refundable, less expenses, if the parties are 28, 2005, the Company executed a $150 million unsecured unable to close on the financing. revolving credit facility, an expansion of the $125 million agreement in place as of December 31, 2004. The facility OFF-BALANCE SHEET ARRANGEMENTS is intended to provide working capital and funds for acquisitions, certain developments and redevelopments. The Company has no off-balance sheet arrangements that The line has a three-year term and provides for an additional are reasonably likely to have a current or future material one-year extension at the Company’s option, subject to the effect on the Company's financial condition, revenues or Company’s satisfaction of certain conditions. Until January expenses, results of operations, liquidity, capital 27, 2007, certain or all of the lenders may, upon request by expenditures or capital resources. the Company and payment of certain fees, increase the revolving credit facility line by up to $50,000,000. Letters FUNDS FROM OPERATIONS of credit may be issued under the revolving credit facility. In 2005, the Company reported Funds From Operations (FFO) The Company closed on two new fixed-rate, non-recourse available to common shareholders (common stockholders financings during the second quarter of 2005. The first loan and limited partner unitholders) of $53,222,000 representing is a refinancing of the $9,200,000, 6.82% interest rate a 13.2% increase over 2004 FFO available to common mortgage loan assumed during the February 2004 acquisition shareholders of $47,031,000. The following table presents a reconciliation from net income to FFO available to common shareholders for the periods indicated: N52 Management’s Discussion & Analysis of Financial Condition & Results of Operations
Funds From Operations For the Year Ended December 31, (Dollars in thousands) 2005 2004 2003 2002 2001 Net income $ 29,227 $ 26,174 $ 19,242 $ 19,566 $ 17,314 Subtract: Gain on sale of property – (572) (182) (1,426) – Add: Minority interests 7,798 8,105 8,086 8,070 8,069 Depreciation and amortization of real property 24,197 21,324 17,838 17,821 14,758 FFO 61,222 55,031 44,984 44,031 40,141 Preferred dividends (8,000) (8,000) (1,244) – – FFO available to common shareholders $ 53,222 $ 47,031 $ 43,740 $ 44,031 $ 40,141 Average shares and units used to compute FFO per share 22,003 21,405 20,790 20,059 19,382
FFO is a widely accepted non-GAAP financial measure of operating performance for REITs. FFO is defined by the National Association of Real Estate Investment Trusts as net income, computed in accordance with GAAP, plus minority interests, extraordinary items and real estate depreciation and amortization, excluding gains or losses from property sales. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income, its most directly comparable GAAP measure, as an indicator of the Company’s operating performance, or as an alternative to cash flows as a measure of liquidity. Management considers FFO a supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. FFO may not be comparable to similarly titled measures employed by other REITs.
ACQUISITIONS, REDEVELOPMENTS growth. The Company also continues to take advantage of AND RENOVATIONS redevelopment, renovation and expansion opportunities within the portfolio, as demonstrated by its recent activities Management anticipates that during the coming year the at Olde Forte Village, Broadlands Village, Thruway, The Glen, Company may: i) redevelop certain of the Current Portfolio Ravenwood and Lansdowne Town Center. The following Properties, ii) develop additional freestanding outparcels or describes the acquisitions, redevelopments and renovations expansions within certain of the Shopping Centers, iii) which affected the Company’s financial position and results acquire existing neighborhood and community shopping of operations in 2005 and 2004. centers and/or office properties, and iv) develop new shopping center or office sites. Acquisition and development Olde Forte Village of properties are undertaken only after careful analysis and review, and management’s determination that such In July 2003, the Company acquired Olde Forte Village, a properties are expected to provide long-term earnings 161,000 square foot neighborhood shopping center located in and cash flow growth. During the coming year, any Fort Washington, Maryland. The center is anchored by a developments, expansions or acquisitions are expected to be newly constructed 58,000 square foot Safeway supermarket funded with bank borrowings from the Company’s credit line, which opened in March 2003, relocating from a smaller store construction financing, proceeds from the operation of the within the center. The center then contained approximately Company’s dividend reinvestment plan or other external 50,000 square feet of vacant space, consisting primarily of capital resources available to the Company. the former Safeway space, which the Company is in the process of redeveloping. The reconfigured shopping center The Company has been selectively involved in acquisition, now totals 143,000 square feet of leasable space. The redevelopment and renovation activities. It continues to Company’s total redevelopment costs, including the initial evaluate the acquisition of land parcels for retail and office property acquisition cost, are expected to total approximately development and acquisitions of operating properties for $22 million. Construction at Olde Forte Village was opportunities to enhance operating income and cash flow substantially completed during the second quarter of 2005. The center was 91% leased at March 9, 2006. N53 Management’s Discussion & Analysis of Financial Condition & Results of Operations
Broadlands Village Shops at Monocacy The Company purchased 24 acres of undeveloped land in the In November 2003, the Company acquired 13 acres of Broadlands section of the Dulles Technology Corridor of undeveloped land in Frederick, Maryland at the southeast Loudoun County, Virginia in April 2002. Broadlands is a 1,500 corner of Maryland Route 26 and Monocacy Boulevard. acre planned community consisting of 3,500 residences, Construction commenced in early December 2003 of a approximately half of which are constructed and currently 109,000 square foot shopping center anchored by a 57,000 occupied. In October 2003, the Company completed square foot Giant grocery store. The Company’s total construction of the first phase of the Broadlands Village development costs, including the land acquisition, were shopping center. The 58,000 square foot Safeway approximately $22.3 million. Construction was completed supermarket opened in October 2003 with a pad building and and Giant opened for business during October 2004. The many in-line small shops also opening in the fourth quarter property was 100% leased at March 9, 2006. of 2003. Construction of a 30,000 square foot second phase commenced in March 2004 and was substantially completed Kentlands Place in the fourth quarter of 2004. The Company’s total In January 2004, the Company purchased 3.4 acres of development costs of both phases, including the land undeveloped land adjacent to its 109,000 square foot acquisition, were approximately $22 million. Both the first and Kentlands Square shopping center in Gaithersburg, second phases were 100% leased at March 9, 2006. During Maryland. The Company substantially completed the fourth quarter of 2005, the Company commenced construction of a 41,300 square foot retail/office property, construction of a third phase of this development, totaling comprised of 24,400 square feet of in-line retail space and approximately 22,000 square feet of shop space and two pad 16,900 square feet of professional office suites, in early 2005. buildings. As of March 9, 2006, leases have been executed Development costs, including the land acquisition, are for 73% of the new shop space. The Company’s development projected to total approximately $8.5 million. The property cost for construction of the third phase is expected to total was 100% leased at March 9, 2006 and includes significant approximately $7.5 million and be completed during the third retail tenants Bonefish Grill and Elizabeth Arden’s Red Door quarter of 2006. Salon.
Thruway Boca Valley Plaza During 2004, the Company completed construction of a The Company added Publix as one of its grocery tenants with 15,725 square foot expansion of the Thruway shopping the February 2004 acquisition of Boca Valley Plaza in Boca center located in Winston Salem, North Carolina. The new Raton, Florida. Boca Valley Plaza is a 121,000 square foot development replaced a former 6,100 square foot single- neighborhood shopping center on U.S. Highway 1 in South tenant pad building with a new multi-tenant building. As of Florida. The center was constructed in 1988, was 96% leased March 9, 2006, all of the new space was leased and occupied at March 9, 2006 and is anchored by a 42,000 square foot by tenants including Ann Taylor Loft, JoS. A Banks Clothiers, Publix supermarket. The property was acquired for a Chico’s and Liz Claiborne. This $2.1 million expansion was purchase price of $17.5 million, subject to the assumption substantially completed in April 2004. of a $9.2 million mortgage.
The Glen Countryside In February 2005, the Company commenced construction of a In mid-February 2004, the Company completed the acquisition 22,000 square foot expansion building at The Glen shopping of the 142,000 square foot Safeway-anchored Countryside center in Prince William County, Virginia. The existing shopping center, its fourth neighborhood shopping center 120,000 square foot Safeway anchored center is 100% leased investment in Loudoun County, Virginia. The center was 97% and this expansion will provide additional restaurants and leased at March 9, 2006 and was acquired for a purchase small shop service space. Construction of the expansion price of $29.7 million. building was substantially completed in the fall of 2005, and development costs are estimated to total $4.1 million. As of March 9, 2006, 100% of the new space was leased. Tenants began occupying space in September 2005 and all tenants are expected to be open for business by the end of the first quarter of 2006. N54 Management’s Discussion & Analysis of Financial Condition & Results of Operations
Cruse MarketPlace Lansdowne Town Center On March 25, 2004, the Company completed the acquisition During the first quarter of 2005, the Company received of the 79,000 square foot Publix-anchored, Cruse approval of a zoning submission to Loudoun County which MarketPlace located in Forsyth County, Georgia. Cruse will allow the development of a neighborhood shopping MarketPlace was constructed in 2002 and was 97% leased center to be known as Lansdowne Town Center, within the at March 9, 2006. The center was purchased for $12.6 Lansdowne Community in northern Virginia. On March 29, million, subject to the assumption of an $8.8 million mortgage. 2005, the Company finalized the acquisition of an additional 4.5 acres of land to bring the total acreage of the Briggs Chaney MarketPlace development parcel to 23.4 acres (including the 18.9 acres In April 2004, the Company acquired Briggs Chaney acquired in 2002). The additional purchase price was MarketPlace in Silver Spring, Maryland. Briggs Chaney approximately $1.0 million. The Company has commenced MarketPlace is a 197,000 square foot neighborhood shopping construction of the 191,000 square foot retail center. The center on Route 29 in Montgomery County, Maryland. The Company’s total development costs, including the land center, constructed in 1983, was 98% leased at March 9, 2006 acquisition, are expected to total approximately $42 million. and is anchored by a 45,000 square foot Safeway The development will be anchored by a 55,000 square foot supermarket and a 28,000 square foot Ross Dress For Less. Harris Teeter grocery store and was 29% pre-leased as of The property was acquired for $27.3 million. The Company March 9, 2006. has completed interior construction to reconfigure a portion of the vacant space totaling approximately 11,000 square feet Ravenwood of leasable area. All of the eight newly created shop spaces During the fourth quarter of 2005, the Company commenced have been leased and were in operation prior to December construction of a 7,380 square foot shop space expansion to 31, 2005. In October 2005, the Company also completed the Giant anchored Ravenwood shopping center, located in construction of a façade renovation of the shopping center. Towson, Maryland. This space is 61% pre-leased and the cost to expand Ravenwood is projected to total $2.2 million. Ashland Square On December 15, 2004, the Company acquired a 19.3 acre Lexington parcel of land in Dumfries, Prince William County, Virginia On September 29, 2005, the Company announced the for a purchase price of $6.3 million. The Company has resolution of a land use dispute at Lexington Mall, allowing preliminary plans to develop the parcel into a grocery- increased flexibility in future development rights for its anchored neighborhood shopping center. The Company property. The Company and the land owner of the adjacent submitted a site plan to Prince William County during the 16 acre site, have resolved a dispute arising from a second quarter of 2005 in order to obtain approvals to build reciprocal easement agreement governing land use between an approximately 160,000 square foot center, and is the two owners. The parties have now executed a new land marketing the project to grocers and other retail businesses. use agreement which grants each other the flexibility to improve its property. The Company also reached an Palm Springs Center agreement with Dillard’s to terminate its lease, without On March 3, 2005, the Company completed the acquisition of consideration exchanged by either party. The Dillard’s store the 126,000 square foot Albertson’s anchored Palm Springs closed during October 2005. During the past several years, Center located in Altamonte Springs, Florida. The center was the Company has not been renewing small shop leases 100% leased at March 9, 2006 and was acquired for a pending settlement with the adjacent owner. The departure purchase price of $17.5 million. of Dillard’s now leaves the mall vacant and combined with the new land use agreement, expands potential redevelopment options. The Company has engaged land New Market planners and assembled a team to proceed with conceptual On March 3, 2005, the Company acquired a 7.1 acre parcel designs. of land located in New Market, Maryland for a purchase price of $500,000. On September 8, 2005, the Company acquired a 28.4 acre contiguous parcel for a purchase price of $1,500,000. The Company has contracted to purchase one additional parcel with the intent to assemble acreage for the development of a retail space near the I-70 interchange. N55 Management’s Discussion & Analysis of Financial Condition & Results of Operations
Jamestown Place Smallwood Village Center On November 17, 2005, the Company acquired the 96,000 On January 27, 2006, the Company acquired the 198,000 square foot Publix-anchored Jamestown Place located in square foot Smallwood Village Center, located on 25 acres Altamonte Springs, Florida. The center was 99% leased at within the St. Charles planned community of Waldorf, March 9, 2006 and was acquired for a purchase price of Maryland, a suburb of metropolitan Washington, DC, through $14.8 million. a wholly-owned subsidiary of its operating partnership. The purchase price was $17.5 million and was paid with Seabreeze Plaza cash and by the assumption of an $11.3 million mortgage On November 30, 2005, the Company acquired the 147,000 loan. The property was 89% leased at March 9, 2006. square foot Publix-anchored Seabreeze Plaza located in Palm Harbor, Florida. The center was 99% leased at March Clarendon 9, 2006 and was acquired for a purchase price of $25.9 million The Company owns an assemblage of land parcels (including subject to the assumption of a $13.6 million mortgage loan. its Clarendon and Clarendon Station operating properties) totaling approximately 1.5 acres adjacent to the Clarendon Metro Station in Arlington, Virginia. The Company is continuing to pursue zoning approvals for a significant mixed-use development project.
PORTFOLIO LEASING STATUS The following chart sets forth certain information regarding our properties for the periods indicated.
Total Properties Total Square Footage Percent Leased As of December 31, Shopping Centers Office Shopping Centers Office Shopping Centers Office 2005 39 5 6,170,000 1,206,000 97.2% 96.6% 2004 35 5 6,012,000 1,205,000 93.5% 95.9% 2003 31 5 5,328,000 1,204,000 94.1% 95.8%
The increase in the shopping center portfolio’s leasing Plaza in suburban Richmond, Virginia also contributed to the percentage in 2005 resulted primarily from the removal from increase over 2004. The departure of the previous grocery service of 133,000 square feet of vacant mall space at store tenant at Southside in 2004 was the largest contributor Lexington Mall which the Company had not leased in 2004 in to the decrease in 2004 leasing percentage compared to anticipation of redeveloping the shopping center. The 2005 2003. leasing of a 39,000 square foot grocery store at Southside N56 Saul Centers Corporate Information
DIRECTORS EXECUTIVE OFFICERS WEB SITE www.saulcenters.com B. Francis Saul II B. Francis Saul II Chairman & Chief Chairman & Chief Executive Officer Executive Officer EXCHANGE LISTING New York Stock B. Francis Saul III B. Francis Saul III Exchange (NYSE) Symbol: President President Common Stock: BFS Preferred Stock: BFS.PrA Philip D. Caraci Scott V. Schneider Senior Vice President, Vice Chairman Chief Financial Officer, TRANSFER AGENT The Honorable Treasurer & Secretary Continental Stock Transfer & Trust John E. Chapoton Company Partner, Brown Investment Advisory Kenneth D. Shoop 17 Battery Place Vice President, New York, NY 10004 Gilbert M. Grosvenor Chief Accounting Officer (800) 509-5586 Chairman of the Board of Trustees, Christopher H. Netter National Geographic Society Senior Vice President, Leasing INVESTOR RELATIONS A copy of the Saul Centers, Inc. Philip C. Jackson, Jr. John F. Collich annual report to the Securities and Adjunct Professor Emeritus, Senior Vice President, Exchange Commission on Form Birmingham-Southern College Retail Development 10-K, which includes as exhibits the Chief Executive Officer and David B. Kay M. Laurence Millspaugh Chief Financial Officer Certifications Managing Director, Senior Vice President, Acquisitions required by Section 302 of the Navigant Consulting, Inc. & Development Sarbanes-Oxley Act, may be General Paul X. Kelley Charles W. Sherren, Jr. printed from the Company’s web 28th Commandant of Senior Vice President, Management site or obtained at no cost to the Marine Corps stockholders by writing to the Thomas H. McCormick address below or calling Charles R. Longsworth Senior Vice President, (301) 986-6016. In 2005, the Chairman Emeritus, Colonial General Counsel Company filed with the NYSE the Williamsburg Foundation Certification of its Chief Executive COUNSEL Officer confirming that he was Patrick F. Noonan Pillsbury Winthrop not aware of any violation by the Chairman Emeritus, Shaw Pittman LLP Company of the NYSE’s corporate The Conservation Fund Washington, DC 20037 governance listing standards. The Honorable James W. Symington INDEPENDENT REGISTERED HEADQUARTERS Of Counsel, O’Connor & Hannan, PUBLIC ACCOUNTING FIRM 7501 Wisconsin Ave. Attorneys at Law Ernst & Young LLP Suite 1500 McLean, Virginia 22102 Bethesda, MD 20814-6522 John R. Whitmore Phone: (301) 986-6200 Financial Consultant N57 Dividend Reinvestment Plan and Annual Meeting of Shareholders
Saul Centers, Inc. offers a dividend reinvestment plan which enables its shareholders to automatically invest some of or all dividends in additional shares. The plan provides shareholders with a convenient and cost-free way to increase their investment in Saul Centers. Shares purchased under the dividend reinvestment plan are issued at a 3% discount from the closing price of the stock on the dividend payment date. The Plan’s prospectus is available for review in the Shareholders Information section of the Company’s web site.
To receive more information please call the plan administrator at (800) 509-5586 and request to speak with a service representative or write: Continental Stock Transfer & Trust Company Attention: Saul Centers, Inc. Dividend Reinvestment Plan 17 Battery Place New York, NY 10004
COMMON STOCK PRICES
Period Share Price High Low Fourth Quarter, 2005 $38.46 $33.82 Third Quarter, 2005 $39.48 $35.10 Second Quarter, 2005 $36.41 $31.80 First Quarter, 2005 $37.25 $32.00
Fourth Quarter, 2004 $39.25 $31.84 Third Quarter, 2004 $33.25 $28.83 Second Quarter, 2004 $32.41 $24.70 First Quarter, 2004 $30.55 $27.30
On March 9, 2006, the closing price was $40.87. There were approximately 360 holders of record as of that date.
The Annual Meeting of Shareholders will be held at 11:00 a.m., local time, on April 28, 2006, at the Hyatt Regency Bethesda, One Bethesda Metro Center, Bethesda, MD (at the southwest corner of the Wisconsin Avenue and Old Georgetown Road intersection, adjacent to the Bethesda Metro Stop on the Metro Red Line.) Saul Centers
7501 Wisconsin Avenue, Suite 1500 Bethesda, MD 20814-6522 Phone: (301) 986-6200 Website: www.saulcenters.com